Notes Complete

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CONTENTS
PAGE
NO.
CHAPTER - The Indian Contract Act, 1872 1-25

1
CHAPTER - The Sale of Goods Act, 1930 25-43

2
CHAPTER - The India Partnership Act, 1932 44-60

3
CHAPTER - The Negotiable Instruments Act, 1881 61-95

4
CHAPTER - The Payment of Bonus Act, 1965 96-117

5
CHAPTER - The Employees Provident Fund and 118-137

6 Miscellaneous Provision Act, 1952
CHAPTER - The Cooperative Societies Act, 1912

7 Including the Multi-state Cooperative
Societies Act, 2002
CHAPTER - The Companies Act, 1956

8
PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 1

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1
THE INDIAN CONTRACT ACT, 1872
Question 1
What is meant by ‘Undue Influence’? ‘A’ applies to a banker for a loan at a time where
there is stringency in the money market. The banker declines to make the loan except
at an unusually high rate of interest. A accepts the loan on these terms. Whether the
contract is induced by undue influence? Decide. (Nov. 2002)
Answer
Meaning of Undue Influence:
Section 16 of the Indian Contract Act, 1872, states that a contract is said to be induced
by undue influence where the relations subsisting between the parties are such that
the parties are in a position to dominate the will of the other and used that position to
obtain an unfair advantage over the other.
A person is deemed to be in that position:
(a) where he holds real or apparent authority over the other or stands in a fiduciary
relation to him;
(b) where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of old age, illness or mental or bodily distress.
(c) where a man who is in position to dominate the will of the other enters into
contract with him and the transaction appears to be unconscionable, the burden of
proving that it is fair, is on him, who is in such a position.
When one of the parties who has obtained the benefits of a transaction is in a position
to dominate the will of the other, and the transaction between the parties appears to
be unconscionable, the law raises a presumption of undue influence [section 16(3)].
Every transaction where the terms are to the disadvantage of one of the parties need
not necessarily be considered to be unconscionable. If the contract is to the advantage
of one of the parties but the same has been made in the ordinary course of business
the presumption of under influence would not be raised.
In the given problem, A applies to the banker for a loan at a time when there is
stringency in the money market. The banker declines to make the loan except at an
unusually high rate of interest. A accepts the loan on these terms. This is a transaction
in the ordinary course of business, and the contract is not induced by undue influence.
As between parties on an equal footing, the court will not hold a bargain to be
unconscionable merely on the ground of high interest. Only where the lender is in a
position to dominate the will of the borrower, the relief is granted on the ground of
undue influence. But this is not the situation in this problem, and therefore, there is no
undue influence.
Question 2

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‘A’ stands surety for ‘B’ for any amount which ‘C’ may lend to B from time to time
during the next three months subject to a maximum of Rs.50,000. One month later A
revokes the guarantee, when C had lent to B Rs.5,000. Referring to the provisions of
the Indian Contract Act, 1872 decide whether ‘A’ is discharged from all the liabilities to
‘C’ for any subsequent loan. What would be your answer in case ‘B’ makes a default in
paying back to ‘C’ the money already borrowed i.e. Rs.5,000?(Nov. 2002)
Answer
The problem as asked in the question is based on the provisions of the Indian Contract
Act 1872, as contained in Section 130 relating to the revocation of a continuing
guarantee as to future transactions which can be done mainly in the following two
ways:
1. By Notice : A continuing guarantee may at any time be revoked by the surety as to
future transactions, by notice to the creditor.
2. By death of surety: The death of the surety operates, in the absence of any
contract to the contrary, as a revocation of a continuing guarantee, so far as
regards future transactions. (Section 131).
The liability of the surety for previous transactions however remains.
Thus applying the above provisions in the given case, A is discharged from all the
liabilities to C for any subsequent loan.
Answer in the second case would differ i.e. A Is liable to C for Rs. 5,000 on default of B
since the loan was taken before the notice of revocation was given to C.
Question 3
State the grounds upon which a contract may be discharged under the provisions of
Indian Contract Act, 1872 (Nov. 2002)
Answer
Discharge of a Contract:
A Contract may be discharged either by an act of parties or by an operation of law
which may be enumerated as follows :
(1) Discharge by performance which may be actual performance or tender of
performance. Actual performance is said to have taken place, when each of the
parties has done what he had agreed to do under the agreement. When the
promisor offers to perform his obligation, but the promisee refuses to accept the
performance. It amounts to attempted performance or tender :
(2) Discharge by mutual agreement : Section 62 of the Indian Contract Act, 1872
provides if the parties to a contract agree to substitute a new contract for it or to
refund or remit or alter it, the original contract need not to be performed. Novation,
Rescission, Alteration and Remission are also the same ground of this nature.
(3) Discharge by impossibility of performance : The impossibility may exist from its
initiation. Alternatively, it may be supervening impossibility which may take place
owing to (a). unforeseen change in law (b). The destruction of subject matter (c).
The non-existence or non-occurrence of particular state of things d). the declaration
of war (Section 56).

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(4) Discharge by lapse of time : A contract should be performed within a specific period
as prescribed in the Law of Limitation Act, 1963. If it is not performed the party is
deprived of remedy at law.
(5) Discharge by operation of law : It may occur by death of the promisor, by
insolvency etc.
(6) Discharge by breach of contract : Breach of contract may be actual breach of
contract or anticipatory breach of contract. When a person repudiates a contract
before the stipulated time, for its performance has arrived, it is an anticipatory
breach. If one of the parties to a contract breaks the contract the party injured
thereby has a right of action for damages as well as he is also discharged from
performing his part of the contract (Section 64).
(7) A promise may dispense with or remit the performance of the promise made to him
or may accept any satisfaction he thinks fit. In the first case, the contract will be
discharged by remission and in the second it is accord and satisfaction (Section 63).
(8) When a promisee neglects or refuses to afford the promisor reasonable facilities for
the performance of the promise, the promisor is excused by such neglect or refusal
(Section 67).
Question 4
What is the status of a “finder of goods” under the Indian Contract Act, 1872? What are
his rights? (May 2003)
Answer
Status of a Finder of Goods & his Rights:
A person, who finds goods belonging to another and takes them into his custody is
subject to the same responsibility as a bailee. He is bound to take as much care of the
goods as a man of ordinary prudence would, under similar circumstances, take of his
own goods of the same bulk, quality and value. He must also take all necessary
measures to trace its owner. If he does not, he will be guilty of wrongful conversion of
the property. Till the owner is found out, the property in goods will vest with the finder
and he can retain the goods as his own against the whole world (except the owner, of
course).
A finder of goods has the following rights under the Indian Contract Act, 1872
1. Right of lien: The finder of goods has a right of lien over the goods for his expenses.
As such he can retain the goods against the owner until he receives compensation
for trouble and expenses incurred in preserving the goods and finding out the
owner. But he has no right to sue the owner for any such compensation (Section
168).
2. Right to sue for reward. The finder can sue for any specific reward which the owner
has offered for the return of the goods. He may also retain the goods until he
receives the reward. (Section 168)
3. Right or resale: The finder has a right to sell the goods in the following cases:
(a) where the goods found is in danger of perishing;
(b) where the owner cannot, with reasonable diligence, be found out;
(c) where the owner is found out, but he refuses to pay the lawful charges of the

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finder; and
(d) where the lawful charges of the finder, in respect of the goods found, amount to
2/3rd of its value.
Question 5
Explain the general rules of relating to “Acceptance” under the Indian Contract Act,
1872.
(May 2003)
Answer
General Rules of Acceptance: Following are the general rules regarding acceptance
under the Indian Contract Act, 1872:
1. Acceptance must be absolute and unqualified [Section 7(I)].
2. Acceptance must be in the prescribed manner. If the offer is not accepted in the
prescribed manner, then the offeror may reject the acceptance within a reasonable
time.
3. Acceptance must be communicated to the offeree. If acceptance is communicated
to the person, other than the offeror, it will not create any legal relationship.
4. Acceptance must be given by the party to whom the offer is made.
5. Acceptance must be given within the prescribed time or within a reasonable time.
6. Acceptance cannot be given before communication of an offer.
7. Acceptance must be made before the offer lapses or is withdrawn.
8. Acceptance must show intention to fulfil the promise.
9. Acceptance can not be presumed from silence.
10. Doing of desired act amounts to acceptance.
Question 6
What tests can be applied in determining whether a person is an agent of another?
State any five circumstances whereunder an agent is personally liable to a third party
for the acts during the course of agency . (May 2003)
Answer
Determining Agency & Agent
The test for determining whether a person is or is not an agent is whether that person
has the capacity to bind the principal and make him answerable to a third person by
bringing him (the principal) into legal relations with the third person and thus establish
a privity of contract between the party and the principal. If yes, he is agent, otherwise
not. This relationship of agency may be created either by express agreement or by
implication:
Under the following circumstances an agent is personally liable.
1. When he represents that he has authority to act on behalf of his principal, but who
does not actually posses such authority or who has exceeded that authority and the
alleged employer does not ratifies his acts. Any loss sustained by a third party by

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the acts of such a person (agent) and who relies upon the representation is to be
made good by such an agent.
2. Where a contract is entered into by a person apparently in the character if agent,
but in reality on his own account, he is not entitled to required performance of it.
3. Where the contract expressly provides for the personal liability of the agent.
4. When the agent signs a negotiable instrument in his own name without making it
clear that he is signing as an agent.
5. Where the agent acts for a principal who cannot be sued on account of his being a
foreign Sovereign, Ambassador, etc.
6. Where the agent works for a foreign principal.
7. Where a Government Servant enters into a contract on behalf of the Union of India
in disregard of Article 299 (1) of the Constitution of India, In such a case the suit
against the agent can be instituted by the third party only and not by the principal
(Chatturbhuj v. Moheshwar).
8. Where according to the usage of trade in certain kinds of business, agents are
personally liable.
Question 7
Explain the concept of ‘misrepresentation’ in matters of contract. Sohan induced Suraj
to buy his motorcycle saying that it was in a very good condition. After taking the
motorcycle, Suraj complained that there were many defects in the motorcycle. Sohan
proposed to get it repaired and promised to pay 40% cost of repairs After a few days,
the motorcycle did not work at all. Now Suraj wants to rescind the contract. Decide
giving reasons. (November 2003)
Answer
Misrepresentation & the Problem: According to Section 18 of the Indian Contract
Act, 1872, misrepresentation is there:
1. When a person positively asserts that a fact is true when his information does not
warrant it to be so, though he believes it to be true.
2. When there is any breach of duty by a person, which brings an advantage to the
person committing it by misleading another to his prejudice.3. When a party
causes, however, innocently, the other party to the agreement to make a mistake
as to the substance of the thing which is the subject of the agreement.
Problem:
The aggrieved party, in case of misrepresentation by the other party, can avoid or
rescind the contract [Section 19, Indian Contract Act, 1872]. The aggrieved party loses
the right to rescind the contract if he, after becoming aware of the misrepresentation,
takes a benefit under the contract or in some way affirms it. Accordingly in the given
case Suraj could not rescind the contract, as his acceptance to the offer of Sohan to
bear 40% of the cost of repairs impliedly amount to final acceptance of the sale [Long
v. Lloyd, (1958)].
Question 8
Sunil delivered his car to Mahesh for repairs. Mahesh completed the work, but did not
return the car to Sunil within reasonable time, though Sunil repeatedly reminded

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Mahesh for the return of car. In the meantime a big fire occurred in the neighborhood
and the car was destroyed. Decide whether Mahesh can be held liable under the
provisions of the Indian Contract Act. 1872. (November 2003)
Answer
The problem asked in the question is based on the provisions of section 160 and 161 of
the Indian Contract Act 1872. Accordingly, it is the duty of the bailee to return or
deliver the goods bailed according to the bailor’s directions, without demand, as soon
as the time for which they were bailed has expired, or the purpose for which they were
bailed for any loss, destruction of the goods from that time (Section 161),
notwithstanding the exercise of reasonable care on his part.
Therefore, applying the above provisions in the given case, Mahesh is liable for the
loss, although he was not negligent, but because of his failure to deliver the car within
a reasonable time (Shaw & Co. v. Symmons & Sons).
Question 9
What do you understand by “Agency by Ratification”? What is the effect of ratification?
Point out any four elements of a valid ratification. (November 2003)
Answer
Agency by Ratification; its effect & essentials of valid ratification:
Meaning: A person may act on behalf on another without his knowledge or consent.
Later on such another person may accept the act of the former or reject it. If he
accepts the act of the former done without his consent, he is said to have ratified that
act and it places the parties in exactly the same position in which they would have
been the former had later’s authority at the time he made the contract. Likewise, when
an agent exceeds the authority bestowed upon him by the principal, the principal may
ratify the unauthorised act.
Effect of Ratification: The effect of ratification is to tender the acts done by one
person (agent) on behalf of another (principal), without his (principal’s) knowledge or
authority, as binding on the other person (principal) as if they had been performed by
his authority (Section 196: Indian Contract Act, 1872).
Further, ratification relates back to the date when the act was done by the agent. This
means the agency comes into existence from the moment the agent first acted and not
from the time when the principal ratified the act.
Essentials of a valid Ratification
1. The agent must purport to act as agent for a principal who is in contemplation and
is identifiable at the time of contract.
2. The principal must be in existence at the time of contract.
3. The principal must have contractual capacity both at the time of the contract and at
the time of ratification.
4. The principal must have the full knowledge of all the material facts.
5. Ratification must be done with in a reasonable time of the act purported to be
ratified.
6. The act to be ratified must be lawful and not void or illegal or ultra vires in case of a
company.

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7. The whole transaction can be ratified.
8. Ratification must be communicated to the party who is sought to be bound by the
act done by the agent.
9. Ratification can be of the acts which the principal had the power to do.
10. Ratification should not put a third party to damages.
11. Ratification relates back to the date of the act of the agent.
Question 10
Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the
shop, took a basket and after taking articles of her choice into the basket reached the
cashier for payments. The cashier refuses to accept the price. Can Shambhu Dayal be
compelled to sell the said articles to Smt. Prakash? Decide. (May 2004)
Answer
Invitation to offer
The offer should be distinguished from an invitation to offer. An offer is the final
expression of willingness by the offeror to be bound by his offer should the party
chooses to accept it. Where a party, without expressing his final willingness, proposes
certain terms on which he is willing to negotiate, he does not make an offer, but invites
only the other party to make an offer on those terms. This is the basic distinction
between offer and invitation to offer.
The display of articles with a price in it in a self-service shop is merely an invitation to
offer. It is in no sense an offer for sale, the acceptance of which constitutes a contract.
In this case, Smt. Prakash in selecting some articles and approaching the cashier for
payment simply made an offer to buy the articles selected by her. If the cashier does
not accept the price, the interested buyer cannot compel him to sell. [Fisher V. Bell
(1961) Q.B. 394 Pharmaceutical society of Great Britain V. Boots Cash Chemists].
Question 11
Akhilesh entered into an agreement with Shekhar to deliver him (Shekhar) 5,000 bags
to be manufactured in his factory. The bags could not be manufactured because of
strike by the workers and Akhilesh failed to supply the said bags to Shekhar. Decide
whether Akhilesh can be exempted from liability under the provisions of the Indian
Contract Act, 1872. (May 2004))
Answer
Delivery of Bags
According to Section 56 (Para 2) of Indian Contract Act, 1872 when the performance of
a contract becomes impossible or unlawful subsequent to its formation, the contract
becomes void, this is termed as ‘supervening impossibility’ (i.e. impossibility which
does not exist at the time of making the contract, but which arises subsequently).
But impossibility of performance is, as a rule, not an excuse from performance. It
means that when a person has promised to do something, he must perform his promise
unless the performance becomes absolutely impossible. Whether a promise becomes
absolutely impossible depends upon the facts of each case.

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The performance does not become absolutely impossible on account of strikes, lockout
and civil disturbances and the contract in such a case is not discharged unless
otherwise agreed by the parties to the contract (Budget V Bennington; Jacobs V Credit
Lyonnais).
In this case Mr. Akhilesh could not deliver the bags as promised because of strike by
the workers. This difficulty in performance cannot be considered as impossible of
performance attracting Section 56 (Para 2) and hence Mr. Akhilesh is liable to Mr.
Shekhar for non-performance of contract.
Question 12
Mr. Seth an industrialist has been fighting a long drawn litigation with Mr. Raman
another industrialist. To support his legal campaign Mr. Seth enlists the services of Mr.
X a legal export slating that an amount of Rs. 5 lakhs would be paid, if Mr. X does not
take up the brief of Mr. Raman. Mr. X agrees, but at the end of the litigation Mr. Seth
refuses to pay. Decide whether Mr. X can recover the amount promised by Mr. Seth
under the provisions of the Indian Contract Act, 1872.(November 2004)
Answer
The problem as asked in the question is based on one of the essentials of a valid
contract. Accordingly, one of the essential elements of a valid contract is that the
agreement must not be one which the law declares to be either illegal or void. A void
agreement is one without any legal effect. Thus any agreement in restraint of trade,
marriage, legal proceedings etc., are void agreements. Thus Mr. X cannot recover the
amount of Rs. 5 lakhs promised by Mr. Seth because it is an illegal agreement and
cannot be enforced by law.
Question 13
What is meant by Anticipatory Breach of Contract?
Mr. Dubious textile enters into a contract with Retail Garments Show Room for supply
of 1,000 pieces of Cotton Shirts at Rs.300 per shirt to be supplied on or before 31 st
December, 2004. However, on 1st November, 2004 Dubious Textiles informs the Retail
Garments Show Room that he is not willing to supply the goods as the price of Cotton
shirts in the meantime has gone upto Rs. 350 per shirt. Examine the rights of the Retail
Garments Show Room in this regard.
(November 2004)
Answer
Anticipatory breach of contract

Anticipatory breach of contract occurs when the promisor refuses altogether to perform
his promise and signifies his unwillingness even before the time for performance has
arrived. In such a situation the promise can claim compensation by way of loss or
damage caused to him by the refusal of the promisor. For this, the promisee need not
wait till the time stipulated in the contract for fulfillment of the promise by the poimisor
is over.
In the given problem Dubious Textiles has indicated its unwillingness to supply the
cotton shirts on 1st November 2004 it self when it has time upto 31s’- December 2004
for performance of the contract of supply of goods. It is therefore called anticipatory
breach of contract. Thus Retail Garments show room can claim damages from Dubious

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Textiles immediately after 1 November, 2004, without waiting upto 31s’ December
st
2004. The damages will be calculated at the rate of Rs. 50 per shirt i.e. the difference
between Rs. 350/- (the price prevailing on 1s1 November) and Rs. 300/- the contracted
price.
Question 14
Distinguish between Contract of Indemnity and Contract of Guarantee. (November
2004)
Answer
Contract of indemnity Contract of Guarantee

1. There are two parties to the 1. There are three parties to the
contract viz. indemnifier viz. creditor, principal debtor
(promisor) and the and the surety
Indemnified (promise).
2 Liability of the indemnifier to 2. Liability of the surety to the
the indemnified is primary creditor is collateral or
and independent. secondary, the primary
liability being that of the
principal debtor.
3 There is only one contract in 3 .In a contract of guarantee
case of a contract of there are three contracts,
indemnity, i.e., between the between principal Debtor
indemnifier and the and Creditor; between
indemnified. creditor and the surety and
between surety and principal
debtor.
4 It is not necessary for the 4. It is necessary that surety
indemnifier to act at the should give the guarantee at
request of the indemnified. the request of the debtor.
5 The liability of the 5. There is usually an existing
indemnifier arises only on the debt or duty, the
happening of a contingency. performance of which is
guaranteed by the surety.
6 An indemnifier cannot sue a 6. A surety, on discharging the
third 6. party for loss in his debt due by the principal
own name, because there is debtor, steps into the shoes
no privity of contract. He can of the creditor. He can
do so only if there is an proceed against the principal
assignment in his favour. debtor in his own right
Question 15

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Father promised to pay his son a sum of Rs. One lakh if the son passed C.A.
examination in the first attempt. The son passed the examination in the first attempt,
but father failed to pay the amount as promised. Son files a suit for recovery of the
amount. State along with reasons whether son can recover the amount under the
Indian Contract Act, 1872
(May 2005)
Answer
Problem asked in the question is based on the provisions of the Indian Contract Act,
1872 as contained in Section 10. According to the provisions there should be an
intention to create legal relationship between the parties. Agreements of a social
nature or domestic nature do not contemplate legal relationship and as such are not
contracts, which can be enforced. This principle has been laid down in the case of
Balfour vs. Balfour (1912 2 KB. 571). Accordingly, applying the above provisions and
the case decision, in this case son cannot recover the amount of Rs.1 lakh from father
for the reasons explained above.
Question 16
A hire a carriage of B and agrees to pay Rs.500 as hire charges. The carriage is
unsafe, though B is unaware of it. A is injured and claims compensation for injuries
suffered by him. B refuses to pay. Discuss the liability of B
(May 2005)
Answer
Problem asked in the question is based on the provisions of the Indian Contract Act,
1872 as contained in Section 150. The section provides that if the goods are bailed for
hire, the bailor is responsible for such damage, whether he was or was not aware of the
existence of such faults in the goods bailed. Accordingly, applying the above
provisions in the given case B is responsible to compensate A for the injuries sustained
even if he was not aware of the defect in the carriage.
Question 17
M Ltd., contracts with Shanti Traders to make and deliver certain machinery to them by
30.6.2004 for Rs. 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and
deliver the machinery to Shanti Traders. Later, Shanti Traders procured the machinery
from another manufacturer for Rs.12.75 lakhs. Shanti Traders was also prevented from
performing a contract which it had made with Zenith Traders at the time of their
contract with M Ltd. and were compelled to pay compensation for breach of contract.
Advise Shanti Traders the amount of compensation which it can claim from M Ltd.,
referring to the legal provisions of the Indian Contract Act.
(May 2005)
Answer
Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of
contract. According to it, when a contract has been broken, the party who suffers by
such breach is entitled to receive from the party who has broken the contract,
compensation for any loss or damage caused to him thereby which naturally arose in
the usual course of things from such breach or which the parties knew when they made
the contract, to be likely to result from the breach of it. Such compensation is not

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given for any remote and indirect loss or damage sustained by reason of the breach. It
is further provided in the explanation to the section that in estimating the loss or
damage from a breach of contract, the means which existed of remedying the
inconvenience caused by the non-performance of the contract must be taken into
account.
Applying the above principle of law to the given case, M Ltd is obliged to compensate
for the loss of Rs.1.25 lakhs (i.e. Rs.12.75 minus Rs.11.50 = Rs. 1.25 lakhs) which had
naturally arisen due to default in performing the contract by the specified date.
Regarding the amount of compensation which Shanti Traders were compelled to make
to Zenith Traders, it depends upon the fact whether M Ltd knew about the contract of
Shanti Traders for supply of the contracted machinery to Zenith Traders on the
specified date. If so, M Ltd is also obliged to reimburse the compensation which Shanti
Traders had to pay to Zenith Traders for breach of contract. Otherwise M Ltd is not
liable.
Question 18
Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension
area. Mr. Singh bought a house for Rs.20 lakhs in the name of a nominee and then
purchased it himself for Rs.24 lakhs. He then sold the same house to Mr. Ahuja for
Rs.26 lakhs. Mr. Ahuja later comes to know the mischief of Mr. Singh and tries to
recover the excess amount paid to Mr. Singh. Is he entitled to recover any amount
from Mr. Singh? If so, how much? Explain.
(November 2005)
Answer
The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as
contained in Section 215 read with Section 216. The two sections provide, that where
an agent without the knowledge of the principal, deals in the business of agency on his
own account, the principal may:
(1) repudiate the transaction, if the case shows, either that the agent has dishonestly
concealed any material fact from him, or that the dealings of the agent have been
disadvantageous to him.
(2) claim from the agent any benefit, which may have resulted to him from the
transaction.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover Rs.6 lakhs
from Mr. Singh being the amount of profit earned by Mr. Singh out of the transaction.
Question 19
Miss X, a film actress agreed to work exclusively for a period of two years, for a film
production company. However, during the said period she enters into a contract to
work for another film producer. Discuss the rights of the aggrieved film production
company under the Indian Contract Act, 1872.
(November 2005)
Answer

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Where a party comments a breach of negative term of a contract i.e., where he does
something which he promised not to do, the aggrieved party can go to court which may
be issue an order restraining him from doing what he promised not to do. Such an
order of the court is known as injunction. Since Miss X has agreed to work exclusively
for the film production company for a period of two years, the aggrieved film
production company can go to court and get injunction order restraining Miss X working
for another film production company. A similar decision was taken in the case of
Warrior Bros vs. Nelson (1937) 1 K.B. 209
Question 20
“An agreement made without consideration is void. “With reference to provisions of
the Indian Contract Act, 1872 examine the validity of the statement and explain the
cases in which the statement does not apply.
(November 2005)
Answer
Validity of an Agreement without consideration: The general rule is that an
agreement made without consideration is void (Section 25). In every valid contract
consideration is very important. A contract may only be enforceable when an adequate
consideration is there. However, the Indian Contract Act, 1872 contains certain
exceptions to this rule. In the following cases, the agreement though made without
consideration, will be valid and enforceable.
1. Natural Love and Affection: A written and registered agreement based on
Natural Love and Affection between the parties standing in near relation (e.g., husband
and wife) to each other is enforceable even without consideration. A contract in writing,
registered on account of natural love and affection between parties standing near
relation to each other are the essential requirements for valid contract though it is
without consideration. (Rajlukhee Devee vs. Bhootnath).
2. Compensation for past voluntary services: A promise to compensate, wholly
or in part, a person who has already voluntarily done something for the promisor, is
enforceable under (Section 25(2). In order that a promise to pay for the past voluntary
services is binding, the following essential factors must exist:
(i) the services should have been rendered voluntarily.
(ii) the services must have been rendered for the promisor.
(iii) the promisor must be in existence at the time when services were
rendered.
(iv) the Promisor must have intended to compensate to the promisee.
3. Promise to pay time barred debt: Where a promise in writing signed by the
person making it or by his authorized agent, is made to pay a debt barred by limitation
it is valid without consideration [Section 25(3)].
4. Agency: According to Section 185 of the Indian Contract Act, 1872 no
consideration is necessary to create an agency.s
5. Completed gift: In case of completed gifts, the rule no consideration no contract
does not apply. Explanation (1) to Section 25 of the Act states “Nothing in this section
shall affect the validity as between the donor and donee, of any gift actually made.”
Thus, gifts do not require any consideration.
Question 21

CA-IPCC
Examine the validity of a contract when the acceptance from the offeree is obtained
under ‘Coercion’ or under ‘Undue influence’. Point out the distinction between
‘Coercion’ and ‘Undue influence’.
(November 2005)
Answer
According to Section 19 of the Indian Contract Act, 1872 when consent to an
agreement is given due to coercion or undue influences, such a contract is voidable at
the option of the party whose consent was so obtained. The difference between
coercion and undue influence is as under:
Coercion Undue Influence

(a) It involves the physical force It involves moral or mental
or threat. The aggrieved pressure. The aggrieved
party is complete to make party believes that he or
the contract against its will. she would make the
contract.
(b) It involves committing or No such illegal act is
threatening to commit an committed or a threat is
act forbidden by Indian given.
Penal Code for detaining or
threatening to detain
property of another person.
(c) It is not necessary that there Some sort of relationship
must be some relationship between the parties is
between the parties. absolutely necessary.
(d) Coercion need not proceed Undue influence is always
from the promisor nor need essential between the
it be directed against the parties to the contract.
promisor.
(e) The contract is voidable at Where consent is induced
the option of the party by undue influence, the
whose consent has been contract is either voidable
obtained by the coercion. or the court may set it
sale or enforce it in a
modified form.
(f) In case of coercion where The court has the
the aggrieved party, as per distinction to direct the
Section 64, rescinds the aggrieved party to return
contract any benefit the benefit in whole or in
received has to be restored part or not to give any
back to the other party. such directions.
Question 22
Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his
acceptance by post. Next day, Ramanathan sends a telegram withdrawing his
acceptance. Examine the validity of the acceptance in the light of the following:

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(i) The telegram of revocation of acceptance was received by Ramaswami before the
letter of acceptance.
(ii) The telegram of revocation and letter of acceptance both reached together.
(May 2006)
Answer
The problem is related with the communication and time of acceptance and its
revocation. As per Section 4 of the Indian Contract Act, 1872, the communication of an
acceptance is a complete as against the acceptor when it comes to the knowledge of
the proposer.
An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards.
Referring to the above provisions
(i) Yes, the revocation of acceptance by Ramanathan (the acceptor) is valid.
(ii) If Ramaswami opens the telegram first (and this would be normally so in case of a
rational person) and reads it, the acceptance stands revoked. If he opens the letter
first and reads it, revocation of acceptance is not possible as the contract has
already been concluded
Question 23
Explain the circumstances whereunder a party to a contract may be exempted from the
performance of contract on the ground of ‘Supervening impossibility’ under the Indian
Contract Act, 1872.
(May 2006)
Answer
Supervening impossibility: When performance of a promise becomes impossible or

illegal by occurrence of an unexpected, event or a change of circumstances beyond the
contemplation of parties, is called supervening impossibility. In case of supervening
impossibility the contract becomes void.
Circumstances: A party to a contract may be excused from the performance
of his promise on the ground of ‘supervening impossibility’ under the Indian
Contract Act, 1872 in the following circumstances.
(a) Accidental destruction of the subject matter of the contract: If the subject matter
of the contract is destroyed by an accident both the parties are excused from the
performance of the contract.
(b) Non-existence or non occurrence of a particular state of things: Non-existence or
non occurrence of a particular state of things of the contract exempts the parties
from the performance of the contract.
(c) Incapacity to perform a contract of personal services: In case of contract of
personal service, disability or incapacity to perform, caused by the act of God e.g.
illness, constitutes lawful excuse for non-performance of the contract.
(d) Change in law: Performance of a contract may also become impossible due to a
subsequent change in the law. The law passed after the contract may prohibit
performance of some act, which may be very basis of the contract. As such the

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contract is discharged due to subsequent impossibility and the parties become free
from their mutual obligations.
(e) Outbreak of war: Contracts may be affected by war in a variety of ways, viz., (i) by
emergency legislation controlling prices or otherwise relating to restriction of trade;
(ii) by prohibiting or restraining transaction with alien enemy.
Question 24
Ravi becomes guarantor for Ashok for the amount which may be given to him by Nalin
within six months. The maximum limit of the said amount is Rs. 1 lakh. After two
moths Ravi withdraws his guarantee. Upto the time of revocation of guarantee, Nalim
had given to Ashok Rs. 20,000.
(i) Whether Ravi is discharged from his liabilities to Nalin for any subsequent loan.
(ii) Whether Ravi is liable if Ashok fails to pay the amount of Rs. 20,000 to Nalin ?
(May
2006)
Answer
Discharge of Surety by Revocation (Problem): As per section 130 of the India
Contract Act, 1872 a specific guarantee cannot be revoked by the surety if the liability
has already accrued. A continuing guarantee may, at any time, be revoked by the
surety, as to future transactions, by notice to the creditor, but the surety remains liable
for transactions already entered into.
As per the above provisions (i) Yes, Ravi is discharged from all the subsequent loan
because it’s a case of continuing guarantee. (ii) Ravi is liable for payment of Rs.
20,000 Nalin because the transaction has already completed
Question 24
X, a minor was studying in M.Com. in a college. On 1st July, 2005 he took a loan of Rs.
10,000 from B for payment of his college fees and to purchase books and agreed to
repay by 31st December, 2005. X possesses assets worth Rs. 2 lakhs. On due date X
fails to pay back the loan to B. B now wants to recover the loan from X out of his (X’s)
assets. Referring to the provisions of Indian Contract Act, 1872 decide whether B
would succeed. (November 2006)
Answer
Yes, B can proceed against the assets of X. According to section 68 of Indian Contract
Act 1872 “If a person, incapable of entering into a contract, or any one whom he is
legally bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.” Since the loan given to X is
for the necessaries suited to the conditions in life of the minor, his assets can be sued
to reimburse B.
Question 25
“The relationship of principal and agent (i.e. Agency) may be constituted by
Subsequent ratification by the principal.” Examine the validity of the statement and
state the requisites of a valid ratification in the light of the provisions of the Indian
Contract Act, 1872.

CA-IPCC
(November 2006)
Answer
Where an agent does an act for his principal without his knowledge or authority or
where he exceeds the given authority, the principal is not held bound by the
transaction so made. However, Section 196 of the Indian Contract Act, 1872, permits
the principal to ratify the act of the agent. According to this section “Where acts are
done by one person on behalf of another, but without his knowledge or authority, he
may elect to ratify or to disown such acts. If he ratify them, the same effects will follow
as if they had been performed by his authority “Agency in such a case is said to be
constituted by ratification.
To be valid, a ratification must fulfill the following conditions:
(i) The agent must purport to act an agent.
(ii) The principal must have been in existence at the time the agent originally acted.
(iii) Ratification may be expressed or implied (Section 197).
(iv) No valid ratification can be made by a person whose knowledge of the facts of the
case is materially defective (Section 198).
(v) Ratification must be of the entire transaction. A contract cannot be ratified
partially (Section 199).
(vi) Ratification of unauthorized act must not injure third person. (Section 200)
(vii) An illegal act cannot be ratified.
(viii) The person ratifying the act must have contractual capacity.
Question 26
Explaining the provisions of the Indian Contract Act, 1872, answer the following:
(i) A contracts with B for a fixed price to construct a house for B within a stipulated
time. B would supply the necessary material to be used in the construction. C
guarantees A’s performance of the contract. B does not supply the material as per
the agreement. Is C discharged from his liability ?
(ii) C, the holder of an over due bill of exchange drawn by A as surety for B, and
accepted by B, contracts with X to give time to B. Is A discharged from his
liability ?(November 2006)
Answer
(i) According to Section 134 of the Indian Contract Act, 1872, the surety is discharged
by any contract between the creditor and the principal debtor, by which the
principal debtor is released or by any act or omission for the creditor, the legal
consequence of which is the discharge of the principal debtor. In the given case
the B omits to supply the timber. Hence C is discharged from his liability.
(ii) According to Section 136 of the Indian Contract Act, 1872, where a contract to
give time to the principal debtor is made by the creditor with a third person and not
with the principal debtor, the surety is not discharged. In the given question the
contract to give time to the principal debtor is made by the creditor with X who is a
third person. X is not the principal debtor. Hence A is not discharged.
Question 27

CA-IPCC
Y holds agricultural land in Gujarat on a lease granted by X, the owner. The land
revenue payable by X to the Government being in arrear, his land is advertised for sale
by the Government. Under the Revenue law, the consequence of such sale will be
termination of Y’s lease. Y, in order to prevent the sale and the consequent
termination of his own lease, pays the Government, the sum due from X. Referring to
the provisions of the Indian Contract Act, 1872 decide whether X is liable to make good
to Y, the amount so paid ? (May 2007)
Answer
Yes, X is bound to make good to Y the amount so paid. Section 69 of the Indian
Contract Act, 1872, provides that “A person who is interested in the payment of money
which another is bound by law to pay, and who therefore pays it, is entitled to be
reimbursed by the other. In the given case Y has made the payment of lawful dues of X
in which Y had an interest. Therefore, Y is entitled to get the reimbursement from X.
Question 28
Examine whether the following constitute a contract of ‘Bailment’ under the provisions
of the Indian Contract Act, 1872:
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities. (May 2007)
Answer
(i) No. Mere custody of goods does not mean possession. For a bailment to exist the
bailor must give possession of the bailed property and the bailee must accept it
(Section 148, Indian Contract Act, 1872 is not applicable).
(ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore
bailment exists and section 148 is applicable.
Question 29
A contracted with B to supply him (B) 500 tons of iron-steel @ Rs. 5,000 per ton, to be
delivered at a specified time. Thereafter, A contracts with C for the purchase of 500
tons of iron-steel @ Rs. 4,800 per ton, and at the same time told ‘C’ that he did so for
the purpose of performing his contract entered into with B. C failed to perform his
contract in due course. Consequently, A could not procure any iron-steel and B
rescinded the contract. What would be the amount of damages which A could claim
from C in the circumstances ? Explain with reference to the provisions of the Indian
Contract, 1872. (May 2007)
Answer
The problem in the question is based on the provisions of the Indian Contract Act, 1872
as contained in Section 73. Section 73 provides that when a contract has been broken
the party who suffers by such breach is entitled to receive from the party who has
broken the contract compensation for any loss or damage caused to him thereby which
naturally arose in the usual course of things from such breach or which the parties
knew when they made the contract to be likely to result from the breach of it. The
leading case in this point is Hadley v Baxendale.
In “Hadley vs. Baxendale” it was decided that if the special circumstances under which
the contract was actually made were communicated by the plaintiffs to the defendants,

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and thus known to both parties, the damages resulting from the breach of such a
contract which they would reasonably contemplate, would be the amount of injury
which would ordinarily follow from a breach of contract under these special
circumstances so known and communicated.
In the instant case ‘A’ had intimated to ‘C’ that he was procuring iron steel from him for
the purpose of performing his contract with ‘B’ Thus, C had the knowledge of the
special circumstance. Therefore, ‘A’ is entitled to claim from ‘C’ Rs. 1,00,000
(difference between the procuring price of iron steel and contracted selling price to ‘B’)
being the amount of profit ‘A’ would have made by the performance of his contract
with ‘B’. If A had not told C of B’s contract then the amount of damages would have
been the difference between the contract price and the market price on the day of
default
Question 30
‘X' agreed to become an assistant for 5 years to 'Y' who was a Doctor practising at
Ludhiana. It was also agreed that during the term of agreement 'X' will not practise on
his own account in Ludhiana. At the end of one year, ‘X' left the assistantship of 'Y' and
began to practise on his own account. Referring to the provisions of the Indian Contract
Act, 1872, decide whether ‘X' could be restrained from doing so? (November
2007)
Answer
An agreement in restraint of trade/business/profession is void under Section 27 of the
Indian Contract Act, 1872. But an agreement of service by which a person binds himself
during the term of the agreement not to take service with anyone else directly or
indirectly to promote any business in direct competition with that of his employer is not
in restraint of trade. However in the given case X cannot be restrained by an injunction
from doing so.
Question 31
X transferred his house to his daughter M by way of gift. The gift deed, executed by X,
contained a direction that M shall pay a sum of Rs. 5,000 per month to N (the sister of
the executant). Consequently M executed an instrument in favour of N agreeing to pay
the said sum. Afterwards, M refused to pay the sum to N saying that she is not liable to
N because no consideration had moved from her. Decide with reasons under the
provisions of the Indian Contract Act, 1872 whether M is liable to pay the said sum to
N. (November 2007)
Answer
As per Section 2 (d) of the Indian Contract Act, 1872, in India, it is not necessary that
consideration must be supplied by the party, it may be supplied by any other person
including a stranger to the transaction.
The problem is based on a case "Chinnaya Vs. Ramayya” is which the Court clearly
observed that the consideration need not necessarily move from the party itself, it may
move from any person. In the given problem, the same reason applies. Hence, M is
liable to pay the said sum to N and cannot deny her liability on the ground that
consideration did not move from N.
Question 32

CA-IPCC
X, Y and Z jointly borrowed Rs.50,000 from A. The whole amount was repaid to A by Y.
Decide in the light of the Indian Contract Act, 1872 whether:
(i) Y can recover the contribution from X and Z,
(ii) legal representatives of X are liable in case of death of X,
(iii) Y can recover the contribution from the assets, in case Z becomes insolvent.
(November 2007)
Answer
Section 42 of the Indian Contract Act, 1872 requires that when two or more persons
have made a joint promise, then, unless a contrary intention appears by the contract,
all such persons jointly must fulfill the promise. In the event of the death of any of
them, his representative jointly with the survivors and in case of the death of all
promisees, the representatives of all jointly must fulfill the promise.
Section 43 allows the promisee to seek performance from any of the joint promisors.
The liability of the joint promisors has thus been made not only joint but "joint and
several". Section 43 provides that in the absence of express agreement to the contrary,
the promisee may compel any one or more of the joint promisors to perform the whole
of the promise.
Section 43 deals with the contribution among joint promisors. The promisors, may
compel every joint promisors to contribute equally to the performance of the promise
(unless a contrary intention appears from the contracts). If any one of the joint
promisors makes default in such contribution the remaining joint promisors must bear
the loss arising from such default in equal shares.
As per the provisions of above sections,
(i) Y can recover the contribution from X and Z because XYZ are joint promisors.
(ii) Legal representative of X are liable to pay the contribution to Y. However, a legal
representative is liable only to the extent of property of the deceased received by
him.
(iii) 'Y' also can recover the contribution from Z's assets.
Question 33
Point out with reasons whether the following agreements are valid or void:
(i) Kamala promises Ramesh to lend Rs. 50,000 in lieu of consideration that Ramesh
gets Kamala’s marriage dissolved and he himself marries her.
(ii) Sohan agrees with Mohan to sell his black horse. Unknown to both the parties, the
horse was dead at the time of agreement.
(iii) Ram sells the goodwill of his shop to Shyam for Rs. 4,00,000 and promises not to
carry on such business forever and anywhere in India.
(iv) In an agreement between Prakash and Girish, there is a condition that they will
not institute legal proceeding against each other without consent..
(v) Ramamurthy, who is a citizen of India, enters into an agreement with an alien
friend.
(May 2008)
Answer

CA-IPCC
Validity of agreements
(i) Void Agreement: As per Section 23 of the Indian Contract Act, 1872 an agreement is
void if the object or consideration is against the public policy.
(ii) Void Agreement: As per Section 20 of the Indian Contract Act, 1872 the contract
caused by mistake of fact are void. There is mistake of fact as to the existence of
subject-matter.
(iii) Void agreement: As per Section 27 of the Indian Contract Act, 1872 an
agreement in restraint of trade is void. However, a buyer can put such a condition
on the seller of good will, not to carry on same business. However, the conditions
must be reasonable regarding the duration and the place of the business.
(iv) Void agreement: An agreement in restraint of legal proceedings is void as per
Section 28 of the Indian Contract Act, 1872.
(v) Valid agreement: An agreement with alien friend is valid, but an agreement with
alien enemy is void.
Question 34
Ravi sent a consignment of goods worth Rs. 60,000 by railway and got railway receipt.
He obtained an advance of Rs. 30,000 from the bank and endorsed and delivered the
railway receipt in favour of the bank by way of security. The railway failed to deliver
the goods at the destination. The bank filed a suit against the railway for Rs. 60,000.
Decide in the light of provisions of the Indian Contract Act, 1872, whether the bank
would succeed in the said suit?
(May 2008)
Answer
Rights of Bailee
As per Sections 178 and 178A of the Indian Contract Act, 1872 the deposit of title
deeds with the bank as security against an advance constitutes a pledge. As a pledge,
a banker’s rights are not limited to his interest in the goods pledged. In case of injury
to the goods or their deprivation by a third party, the pledgee would have all such
remedies that the owner of the goods would have against them. In Morvi Mercantile
Bank Ltd. vs. Union of India, the Supreme Court held that the bank (pledgee) was
entitled to recover not only the amount of the advance due to it, but the full value of
the consignment. However, the amount over and above his interest is to be held by
him in trust for the pledgor. Thus, the bank will succeed in this claim of Rs. 60,000
against Railway.
Question 35
R is the wife of P. She purchased some sarees on Credit from Q. Q demanded the
amount from P. P refused. Q filed a suit against P for the said amount. Decide in the
light of provisions of the Indian Contract Act, 1872, whether Q would succeed? (May
2008)
Answer
Problem on Agency

CA-IPCC
Problem as asked in the question is based on the provisions related with the modes of
creation of agency relationship under the Indian Contract Act, 1872. Agency may be
created by a legal presumption; in a case of cohabitation by a married woman (i.e. wife
is considered as an implied agent, of her husband). If wife lives with her husband,
there is a legal presumption that a wife has authority to pledge her husband’s credit for
necessaries. But the legal presumption can be rebutted in the following cases:
(i) Where the goods purchased on credit are not necessaries.
(ii) Where the wife is given sufficient money for purchasing necessaries.
(iii) Where the wife is forbidden from purchasing anything on credit or contracting
debts.
(iv) Where the trader has been expressly warned not to give credit to his wife.
If the wife lives apart for no fault on her part, wife has authority to pledge her
husband’s credit for necessaries. This legal presumption can be rebutted only in cases
(iii) and (iv).
Applying the above conditions in the given case ‘Q’ will succeed. He can recover the
said amount from ‘P’ if sarees purchased by ‘R’ are necessaries for her.
Question 36
M lends a sum of Rs.5,000 to B, on the security of two shares of a Limited Company on
1st April 2007. On 15th June, 2007, the company issued two bonus shares. B returns the
loan amount of Rs.5,000 with interest but M returns only two shares which were
pledged and refuses to give the two bonus shares. Advise B in the light of the
provisions of the Indian Contract Act, 1872. (November 2008)
Answer
Bailee’s duties and Liabilities
The problem as asked in the question is based on the provisions of Section 163(4) of
the Indian Contract Act,1872. As per the section, “in the absence of any contract to the
contrary, the bailee is bound to deliver to the bailor, any increase or profit which may
have accrued from the goods bailed.”
Applying the provisions to the given case, the bonus shares are an increase on the
shares pledged by B to M. So M is liable to return the shares along with the bonus
shares and hence B the bailor, is entitled to them also (Motilal v Bai Mani ).
Question 37
B owes C a debt guaranteed by A. C does not sue B for a year after the debt has
become payable. In the meantime, B becomes insolvent. Is A discharged? Decide with
reference to the provisions of the Indian Contract Act, 1872.(November 2008)
Answer
Discharge of surety
The problem is based on the provisions of Section 137 of the Indian Contract Act, 1872
relating to discharge of surety. The section states that mere forbearance on the part of
the creditor to sue the principal debtor and/or to enforce any other remedy against him
would not, in the absence of any provision in the guarantee to the contrary, discharge
the surety. In view of these provisions, A is not discharged from his liability as a surety.

CA-IPCC
Question 38
“Good Girl” Soap Co. advertised that it would give a reward of Rs.1,000 who developed
skin disease after using, “Good Girl” soap of the company for a certain period
according to the printed directions. Miss Rakhi purchased the advertised “Good Girl”
and developed skin disease in spite of using this soap according to the printed
instructions. She claimed reward of Rs.1,000. The company refused the reward on the
ground that offer was not made to her and that in any case she had not communicated
her acceptance of the offer. Decide whether Miss Rakhi can claim the reward or not.
Refer the relevant case law, if any. (November 2008)
Answer
General offer
Yes, Miss Rakhi can claim the reward of Rs.1,000 because the advertisement issued by
the company is an offer made to the public in general and hence any one can accept
and do the desired act. Where a general offer is of continuing nature, it will be open for
acceptance to any number of persons until it is retracted. The Contract Act posits that
performance of the conditions of a proposal is an acceptance of the proposal. So there
is no need of actual and formal offer and the communication of an acceptance of an
offer. Relevant case law is Carlill v. Carbolic Smoke Ball Co.

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2
THE SALE OF GOODS ACT, 1930
Question 1
Explain the provisions of law relating to unpaid seller’s ‘right of lien’ and distinguish it
from the “right of stoppage the goods in transit”. (Nov. 2002)
Answer
Right of lien of an unpaid seller
The legal provisions regarding the right of lien of an unpaid seller has been stated from
Sections 47 to 49 of the Sale of Goods Act, 1930 which may be enumerated as follows :
(i) According to Section 47 the unpaid seller of the goods who is in possession of them
is entitled to retain possession of them until payment or tender of the price in the
following cases namely :
(a) where the goods have been sold without any stipulation as to credit.
(b) where the goods have been sold on credit, but the term of credit has expired;
or
(c) where the buyer becomes insolvent.
The seller may exercise his right of lien not withstanding that he is in possession of the
goods as agent or bailee for the buyer.
(ii) Section 48 states that where an unpaid seller has made part delivery of the goods,
he may exercise his right of lien on the remainder, unless such part delivery has
been made under such circumstances as to show an agreement to waive the lien.
(iii) According to Section 49 the unpaid seller loses his lien on goods :
(a) when he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods.
(b) when the buyer or his agent lawfully obtains possession of the goods ;
(c) by waiver thereof
The unpaid seller of the goods, having a lien thereon, does not lose his lien by reason
only that he has obtained a decree to the price of the goods
Right of lien and Right to stoppage the goods in transit; distinction:
(i) The essence of a right of lien is to retain possession whereas the right of stoppage
in transit is right to regain possession.

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(ii) Seller should be in possession of goods under lien while in stoppage in transit (i)
Seller should have parted with the possession (ii) possession should be with the
carrier and (iii) Buyer has not acquired the possession.
(iii) Right of lien can be exercised even when the buyer is not insolvent but it is not the
case with right of stoppage in transit.
(iv) Right of stoppage in transit begins when the right of lien ends. Thus the end of the
right of lien is starting point of the right of stoppage the goods in transit.
Question 2
What are the consequences of “destruction of goods” under the Sale of Goods Act,
1930, where the goods have been destroyed after the agreement to sell but before the
sale is affected. (May 2003)
Answer
Destruction of Goods-Consequences:
(i) In accordance with the provisions of the Sale of Goods Act, 1930 as contained in
Section 7, a contract for the sale of specific goods is void if at the time when the
contract was made; the goods without the knowledge of the seller, perished or
become so damaged as no longer to answer to their description in the contract,
then the contract is void ab initio. This section is based on the rule that where both
the parties to a contract are under a mistake as to a matter of fact essential to a
contract, the contract is void.
(ii) In a similar way Section 8 provides that an agreement to sell specific goods
becomes void if subsequently the goods, without any fault on the par of the seller
or buyer, perish or become so damaged as no longer to answer to their description
in agreement before the risk passes to the buyer. This rule is also based on the
ground of impossibility of performance as stated above.
It may, however, be noted that section 7 & 8 apply only to specific goods and not to
unascertained goods. If the agreement is to sell a certain quantity of unascertained
goods, the perishing of even the whole quantity of such goods in the possession of
the seller will not relieve him of his obligation to deliver the goods.
Question 3
What do you understand by “Caveat-Emptor” under the sale of Goods Act, 1930? What
are the exceptions to this rule? (May 2003)

CA-IPCC
Answer
‘Caveat emptor’ means “let the buyer beware”, i.e. in sale of goods the seller is under
no duty to reveal unflattering truths about the goods sold. Therefore, when a person
buys some goods, he must examine them thoroughly. If the goods turn out to be
defective or do not suit his purpose, or if he depends upon his skill and judgment and
makes a bad selection, he cannot blame any body excepting himself.
The rule is enunciated in the opening words of section 16 of the Sale of Goods Act,
1930 which runs thus: “Subject to the provisions of this Act and of any other law for the
time being in force, there is no implied warranty or condition as to the quality or fitness
for any particular purpose of goods supplied under a contract of sale”
The rule of caveat emptor does not apply in the following cases:
1. Fitness for buyer’s purpose: Where the buyer, expressly or by implication, makes
know to the seller the particular purpose for which he requires the goods and relies
on the seller’s skill or judgment and the goods are of a description which it is in the
course of the seller’s business to supply, the seller must supply the goods which
shall be fit for the buyer’s purpose. (Section16(1).
2. Sale under a patent or trade name: In the case of a contract for the sale of a
specified article under its patent or other trade name, there is no implied condition
that the goods shall be reasonably fit for any particular purpose (Section 16(1).
3. Merchantable quality: Where goods are bought by description from a seller who
deals in goods of that description (whether he is in the manufacturer or producer or
not), there is an implied condition that the goods shall be of merchantable quality.
But if the buyer has examined the goods, there is no implied condition as regards
defects which such examination ought to have revealed. (Section 16(2).
4. Usage of trade: An implied warranty or condition as to qualify or fitness for a
particular purpose may be annexed by the usage of trade. (Section 16(3).
5. Consent by fraud: Where the consent of the buyer, in a contract of sale, is obtained
by the seller by fraud or where the seller knowingly conceals a defect which could
not be discovered on a reasonable examination, the doctrine of caveat emptor does
not apply.
Question 4
In what ways does a “Sale” differ from “Hire-Purchase”?(November 2003)
Answer
Distinction between ‘Sale’ and ‘Hire Purchase’
1. In case of hire purchase, the agreement is that the hirer regularly pays the various
installments agreed between the parties. In Sale the payment-may be made cash
-down or through installments.
2. The subject matter of the hire, on payment of the last installment, shall become the
property of the hirer, if such installments are not paid, the article will remain the
property of the hire-vendor (seller) and the hire vendor will be entitled to regain
possession thereof. In Sale, the property in goods is transferred to the buyer
immediately on signing the contract.

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3. A hire purchase agreement is both a bailment and an option to buy. In case of Sale
it is not so.
4. In case of hire purchase the hirer cannot sell the article to a third party. In Sale the
purchaser can do so. This is based on the concept of ownership.
Question 5
What are the implied conditions in a contract of ‘Sale by sample’ under the Sale of
Goods Act, 1930? State also the implied warranties operatives under the said Act.
(November 2002, November 2003)

Answer
The-following are implied conditions in a contract of sale by sample in accordance with
Section 17 of the Sale of Goods Act, 1930;
(a) that the bulk shall correspond with the sample in quality;
(b) that the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
(c) that the goods shall be free from any defect, rendering them unmerchantable,
which would not be apparent on a reasonable examination of the sample [Section
17(2)].
Implied Warrants:
1. Warranty of quiet possession [Section 14(b)]: In a contract of sale, unless there is a
contrary intention, there is an implied warranty that the buyer shall have and enjoy
quiet possession of the goods. If the buyer is in any way distributed in the
enjoyment of the goods in consequence of the seller’s defective title to sell, he can
claim damages from the seller.
2. Warranty of freedom from encumbrances [Section 14(c)]: The buyer is entitled to a
further warranty that the goods are not subject to any charge or encumbrance in
favour of a third party. If his possession is in any way disturbed by reason of the
existence of any charge or encumbrances on the goods in favour of any third party,
he shall have a right to claim damages for breach of this warranty.
3. Warranty as to quality or fitness by usage of trade [Section 16(3)]. An implied
warranty as to quality or fitness for a particular purpose may be annexed by the
usage of trade,
4. Warranty to disclose dangerous nature of goods: Where a person sells goods,
knowing that the goods are inherently dangerous or they are likely to be dangerous
to the buyer and that the buyer is ignorant of the danger, he must warn the buyer
of the probable danger, otherwise he will be liable in damages.
Question 6
For the purpose of making uniform for the employees, Bansi Bhaiya bought dark blue
coloured cloth from Vivek, but did not disclose to the seller the purpose of said
purchase. When uniforms were prepared and used by the employees, the cloth was
found unfit. However, there was evidence that the cloth was fit for caps, boots and

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carriage lining. Advise Bansi Bhaiya whether he is entitled to have any remedy under
the sale of Goods Act, 1930?
(May 2004)
Answer
Fitness of Cloth
As per the provision of Section 16(1) of the Sale of Goods Act, 1930, an implied
condition in a contract of sale that an article is fit for a particular purpose only arises
when the purpose for which the goods are supplied is known to the seller, the buyer
relied on the seller’s skills or judgement and seller deals in the goods in his usual
course of business. In this case, the cloth supplied is capable of being applied to a
variety of purposes, the buyer should have told the seller the specific purpose for which
he required the goods. But he did not do so. Therefore, the implied condition as to the
fitness for the purpose does not apply. Hence, the buyer will not succeed in getting
any remedy from the seller under the Sale of Goods Act [Jones v. Padgett. 14 Q.B.D.
650].
Question 7
What do you understand by the term “unpaid seller” under the Sale of Goods Act,
1930? When can an unpaid seller exercise the right of stoppage of goods in transit?
(May 2004)
Answer
Unpaid Seller
According to Section 45 of the Sale of Goods Act, 1930 the seller of goods is deemed to
be an ‘Unpaid Seller’ when-
(a) the whole of the price has not been paid or tendered.
(b) a bill of exchange or other negotiable instrument has been received as conditional
payment, and it has been dishonoured.

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Right of stoppage of goods in transit
When the unpaid seller has parted with the goods to a carrier and the buyer has
become insolvent, he can exercise this right by asking the carrier to return the goods
back, or not to deliver the goods to the buyer.
However, the right of stoppage in transit is exercised only when the following
conditions are fulfilled:
(a) The seller must be unpaid.
(b) The seller must have parted with the possession of goods.
(c) The goods must be in the course of transit.
(d) The buyer must have become insolvent.
(e) The right is subject to provisions of the Act.
Question 8
Point out the differences between conditions and warranties under the Sale of Goods
Act, 1930. (May 2004)
Answer
Condition and Warranty
S. Basis of Condition Warranty
No. distinction
1. Nature A condition is a stipulation A Warranty is a stipulation
which is essential to the main which is collateral to the main
purpose of the contract. purpose of the contract.
2. Rights The aggrieved party can The aggrieved party can claim
repudiate the contract of sale damages only in case of
in case there is a breach of a breach of a warranty.
condition
3. Option A breach of condition may be A breach of a warranty, con
treated as a breach of a not be treated as a breach of
warranty. This would happen a condition.
where the aggrieved party is
contended with damages only
Question 9
With a view to boost the sales Hanuman Automobiles sells a motorcar to Mr. A on trial
basis for a period of three days with a condition that if Mr. A is not satisfied with the
performance of the car, he can return back the car. However, the car was destroyed in
a fire accident at the place of Mr. A before the expiry of three days. Decide whether Mr.
A is liable for the loss suffered. (November 2004)
Answer

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The problem as asked in the question is based on the provisions of the Sale of Goods
Act, 1930 as contained in Section 8. Accordingly, the contract becomes void if the
goods are destroyed or do not answer to the description in the agreement before the
risk passes on to the buyer. In the given case that the subject matter of the contract
i.e Motorcar was destroyed before the transfer of property from the seller to the buyer.
Thus the risk passes only when the ownership is transferred to the buyer. Therefore, in
the present case Mr. A is not liable for the loss suffered due to the fire accident over
which A has no control. Thus M/s. Hanuman Automobiles will have to bear whatever
loss that has taken place due to the fire accident.
Question 10
State briefly the essential element of a contract of sale under the Sale of Goods Act,
1930. Examine whether there should be an agreement between the parties in order to
constitute a sale under the said Act. (November 2004)
Answer
Essentials of Contract of Sale
The following elements must co-exist so as to constitute a contract of sale of goods
under the Sale of Goods Act, 1930.
(i) There must be at least two parties
(ii) The subject matter of the contract must necessarily be goods
(iii) A price in money (not in kind) should be paid or promised.
(iv) A transfer of property in goods from seller to the buyer must take place.
(v) A contract of sale must be absolute or conditional [section 4(2)].
(vi) All other essential elements of a valid contract must be present in the contract of
sale.
The Supreme Court has held in the case of “Stare of Madras Vs. Gannon Dunkerley and
Co. AIR (1858) S (500)” that according to the law in order to constitute a sale, it is
necessary that there should be an agreement between the parties for the purpose of
transferring title of goods which of course presupposes capacity to contract, that it
must be supported by money consideration that as a result of transaction the property
in the goods must actually pass etc.
Question 11
When can an unpaid seller of goods exercise his right of lien over the goods under the
Sale of Goods Act? Can he exercise his right of lien even if the property in goods has
passed to the buyer? When such a right is terminated? Can he exercise his right even
after he has obtained a decree for the price of goods from the court? (May
2005)
Answer
A lien is a right to retain possession of goods until the payment of the price. It is
available to the unpaid seller of the goods who is in possession of them where-
(i) the goods have been sold without any stipulation as to credit;
(ii) the goods have been sold on credit, but the term of credit has expired;

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(iii) the buyer becomes insolvent.
The unpaid seller can exercise ‘his right of lien even if the property in goods has
passed on to the buyer. He can exercise his right even if he is in possession of the
goods as agent or bailee for the buyer.
Termination of lien: An unpaid seller losses his right of lien thereon-
(i) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods;
(ii) When the buyer or his agent lawfully obtains possession of the goods;
Question 12
“……there is no implied warranty or condition as to quality or fitness for any particular
purpose of goods supplied under a contract of sale….”Discuss the significance and
State exceptions, if any. s
(May 2005)
Answer
The statement given in the question is the fundamental principle of law of sale of
goods, sometime expressed by the maximum ‘Caveat Emptor’ meaning thereby ‘Let
the buyer be aware’. In other words, it is no part of the seller’s duty in a contract of
sale of goods to give the buyer an article suitable for a particular purpose, or of
particular quality, unless the quality or fitness is made an express terms of the
contract. The person who buys goods must keep his eyes open, his mind active and
should be cautious while buying the goods. If he makes a bad choice, he must suffer
the consequences of lack of skill and judgement in the absence of any
misrepresentation or guarantee by the seller.
There are, however, certain exceptions to the rule which are stated as under:
(i) Where the buyer expressly or by implication, makes known to the seller the
particular purpose for which he needs the goods and depends on the skill and
judgement of the seller whose business is to supply goods of that description, there
is an implied condition that the goods shall be reasonably fit for that purpose;
(ii) If the buyer purchasing an article for a particular use is suffering from an
abnormality and it is made known to the seller at the time of sale, implied condition
of fitness will apply.
(iii) If the buyer purchases an article under its patent or other trade name and relies on
seller’s skills and judgement which he makes known to him, the implied condition
that are articles are fit for a particular purpose shall apply.
(iv) If the goods can be used for a number of purposes the buyer must tell the seller the
particular purpose for which he required the goods otherwise implied condition of
fitness of goods for a particular purpose will not apply.
(v) Where the goods are bought by description from a seller who deals in goods of that
description whether he is the manufacturer or producer or not, there is an implied
condition that the goods are of merchantable quality.
(vi) An implied condition as to quality or fitness for a particular purpose may be
annexed by the usage of trade or custom;
In a sale by sample there is an implied condition that
(a) The bulk shall correspond with the sample in quality;

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(b) The buyer shall have reasonable opportunity of comparing the bulk with the
sample; and
(c) The goods shall be free from any defect, rendering them unmerchantable;
(viii) In the case of eatables and provisions in addition to the implied condition of
merchantability, there is an implied condition that the goods shall be wholesome.
Question 13
J the owner of a Fiat car wants to sell his car. For this purpose he hand over the car to
p, a mercantile agent for sale at a price not less than Rs. 50, 000. The agent sells the
car for Rs. 40, 000 to A, who buys the car in good faith and without notice of any fraud.
P misappropriated the money also. J sues A to recover the Car. Decide given reasons
whether J would succeed.
(November 2005)
Answer
The problem in this case is based on the provisions of the Sale of Goods Act, 1930
contained in the proviso to Section 27. The proviso provides that a mercantile agent is
one who in the customary course of his business, has, as such agent, authority either
to sell goods, or to consign goods, for the purpose of sale, or to buy goods, or to raise
money on the security of goods [Section 2(9)]. The buyer of goods form a mercantile
agent, who has no authority from the principal to sell, gets a good title to the goods if
the following conditions are satisfied:
(1) The agent should be in possession of the goods or documents of title to the
goods with the consent of the owner.
(2) The agent should sell the goods while acting in the ordinary course of business
of a mercantile agent.
(3) The buyer should act in good faith.
(4) The buyer should not have at the time of the contract of sale notice that the
agent has no authority to sell.
In the instant case, P, the gent, was in the possession of the car with J’s consent for the
purpose of sale. A, the buyer, therefore obtained a good title to the car. Hence, j in
this case, cannot recover the car from A. A similar decision, in analogous
circumstances, was taken in Folkes v. King.
Question 14
“Nemo Dat Quod Non Habet” – “None can give or transfer goods what he does not
himself own.”
Explain the rule and state the cases in which the rule does not apply under the
provisions of the Sale of Goods Act, 1930.
(November 2005)
Answer
Exceptions to the Rule Nemo dat Quod Non Habet: The term means, “none can give or
transfer goods what he does not himself own”. Exceptions to the rule and the cases in
which the Rule does not apply under the provisions of the Sale of Goods Act, 1930 are
enumerated below:

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(1) Effect of Estoppel (Section 27): Where the owner is stopped by the conduct from
denying the seller’s authority to sell, the transferee will get a good title as against
the true owner. But before a good title by estoppel can be made, it must be shown
that the true owner had actively suffered or held out the other person in question
as the true owner or as a person authorized to sell the goods.
(2) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods or
document of title to goods would pass a good title to the buyer in the following
circumstances, namely;
(a) if he was in possession of the goods or documents with the consent of the
owner;
(b) if the sale was made by him when acting in the ordinary course of business as a
mercantile agent; and
(c) if the buyer had acted in good faith and has at the time of the contract of sale,
no notice of the fact that the seller had no authority to sell.(Proviso to Section
27).
(3) Sale by one of the joint owners: If one of the several joint owners of goods has
the sole possession of them with the permission of the others the property in the
goods may be transferred to any person who buys them from such a joint owner in
good faith and does not at the time of the contract of sale have notice that the
seller has no authority to sell. [Section 28].
(4) Sale by a person in possession under voidable contract: A buyer would
acquire a good title to the goods sold to him by seller who had obtained possession
of the goods under a contract voidable on the ground of coercion, fraud,
misrepresentation or undue influence provided that the contract had not been
rescinded until the time of the sale (Section 29).
(5) Sale by one who has already sold the goods but continues in possession
thereof: If a person has sold goods but continues to be in possession of them or of
the documents of title to them, he may sell them to a third person, and if such
person obtains the delivery thereof in good faith without notice of the previous
sale, he would have good title to them, although the property in the goods had
passed to the first buyer earlier. A pledge or other deposition of the goods or
documents of title by the seller in possession are equally valid. [Section 30(1)].
(6) Sale by buyer obtaining possession before the property in the goods has
vested in him: Where a buyer with the consent of seller obtains possession of the
goods before the property in them has passed to him, he may sell, pledge or
otherwise dispose of the goods to a third person, and if such person obtains
delivery of the goods in good faith and without notice of the lien or other right of
the original seller in respect of the goods in good faith and without notice of the
lien or other right of the original seller in respect of the goods, he would get a good
title to them. [Section 30(2)].
(7) Sale by an unpaid seller: Where on unpaid seller who had exercised his right of
lien or stoppage in transit resells the goods, the buyer acquires a good title to the
goods as against the original buyer [Section 54(3)].
(8) Sale under the provisions of other Acts:
(i) Sale by an official Receiver or liquidator of the company will give the purchaser
a valid title.

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(ii) Purchase of goods from a finder of goods will get a valid title under
circumstances.
(iii) Sale by a pawnee under default of pawnor will give valid title to the purchaser.
Question 15
Suraj sold his car to Sohan for Rs. 75,000. After inspection and satisfaction, Sohan
paid Rs. 25,000 and took possession of the car and promised to pay the remaining
amount within a month. Later on Sohan refuses to give the remaining amount on the
ground that the car was not in a good condition. Advise Suraj as to what remedy is
available to him against Sohan.
(May 2006)
Answer
As per the section 55 of the Sale of Goods Act, 1930 an unpaid seller has a right
to institute a suit for price against the buyer personally. The said Section lays
down that
(i) Where under a contract of sale the property in the goods has passed to buyer and
the buyer wrongfully neglects or refuses to pay for the goods, the seller may sue
him for the price of the goods [Section 55(1)].
(ii) Where under a contract of sale the price is payable on a certain day irrespective of
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller
may sue him for the price. It makes no difference even if the property in the goods
has not passed and the goods have not been appropriated to the contract [Section
55(2)].
This problem is based on above provisions. Hence, Suraj will succeed against Sohan for
recovery of the remaining amount. Apart from this Suraj is also entitled to:-
(1) Interest on the remaining amount
(2) Interest during the pendency of the suit.
(3) Costs of the proceedings.
Question 16
Point out the differences between the transactions of “Sale” and “hire-purchase” in the
light of the provisions of the Sale of Goods Act, 1930. (May
2006)
Answer
Following are the differences between sale and hire purchase:
Sale Hire Purchase
Agreement
1. Ownership is transferred from 1 Ownership is transferred
the seller to the buyer as . from the seller to the
soon as the contract is hire-purchaser only when
entered into. a certain agreed number
of installments are paid.
2. The position of the buyer is 2 The position of the hire-

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that of the owner . purchaser is that of the
bailee.
3. The buyer cannot terminate 3 The hire-purchaser has an
the contract and as such is . option to terminate the
bound to pay the price of the contract at any stage,
goods. and cannot be forced to
pay the further
installments.
4. If the payment is made by 4 The installments paid by
the buyer in installments, the . the hire-purchaser are
amount payable by the buyer regarded as hire charges
to the seller is reduced, for and not as payment
the payment made by the towards the price of the
buyer is towards the price of goods till option to
the goods. purchase the goods is
exercised.
5. The Sale agreements are 5 The hire-purchase
governed by the Sales of . agreements are governed
Goods Act, 1930. by the Hire-Purchase Act,
1972.
Question 17
A contracts to sell B, by showing sample, certain quantity of rape-seed oil described as
‘foreign refined rape-seed-oil’. The oil when delivered matches with the sample, but is
not foreign refined rape-seed oil. Referring to the provisions of Sale of Goods Act, 1930
advise the remedy, if any, available to B.
(November 2006)
Answer
B has a remedy to repudiate the contract. According to section 15 of the Sale of Goods
Act, 1930, when the goods are sold by sample as well as by description, there shall be
an implied condition that the goods shall correspond to the sample as well as
description. In this case, A supplied refined rape oil which did correspond with the
sample but was not correspond to the description of foreign refined rape-oil. Hence the
B has the right to repudiate the contract.
Question 18
Distinguish between a ‘Condition’ and a ‘Warranty’ in a contract of sale. When shall a
‘breach of condition’ be treated as ‘breach of warranty’ under the provisions of the
Sale of Goods Act, 1930 ? Explain.
(November 2006)
Answer
Difference between Condition and Warranty
(i) A condition is a stipulation essential to the main purpose of the contract whereas a
warranty is a stipulation collateral to the main purpose of the contract.

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(ii) Breach of condition gives rise to a right to treat the contract as repudiated whereas
in case of breach of warranty, the aggrieved party can claim damage only.
(iii) Breach of condition may be treated as breach of warranty whereas a breach of
warranty cannot be treated as breach of condition.
According to Section 13 of the Sale of Goods Act, 1930 a breach of condition may be
treated as breach of warranty in following circumstances:
(i) Where a contract of sale is subject to any condition to be fulfilled by the seller, the
buyer may waive the condition,
(ii) Where the buyer elects to treat the breach of condition as breach of a warranty.
(iii) Where the contract of sale is non-severable and the buyer has accepted the whole
goods or any part thereof.
(iv) Where the fulfillment of any condition or warranty is excused by law by reason of
impossibility or otherwise.
Question 19
A, an agent of a buyer, had obtained goods from the Railway organization and loaded
the goods on his truck. In the meantime, the Railway organization received a notice
from B, a seller, for stopping goods in transit as the buyer had become insolvent.
Referring to the provisions of the Sale of Goods Act, 1930 decide whether the Railway
organization can stop the goods in transit, as instructed by the seller ? May 2007)
Answer
The right of stoppage of goods in transit can be exercised only so long as the goods are
in the course of transit. In the given case the transit was at an end as soon as the
agent of the buyer obtained goods from the Railway Organisation. Therefore Railway
Organisation cannot act as instructed by the seller, who has lost the right of stoppage
of the goods in transit as provided in Section 30 of the Sale of Goods Act, 1930.
Question 20
Mr. S agreed to purchase 100 bales of cotton from V, out of his large stock and sent his
men to take delivery of the goods. They could pack only 60 bales. Later on, there was
an accidental fire and the entire stock was destroyed including 60 bales that were
already packed. Referring to the provisions of the Sale of Goods Act, 1930 explain as
to who will bear the loss and to what extent? (May 2007)
Answer
Section 26 of the Sale of Goods Act, 1930 provides that unless otherwise agreed, the
goods remain at the seller’s risk until the property therein is transferred to the buyer,
but when the property therein is transferred to the buyer, the goods are at buyer’s risk
whether delivery has been made or not. Further Section 18 read with Section 23 of the
Act provide that in a contract for the sale of unascertained goods, no property in the
goods is transferred to the buyer, unless and until the goods are ascertained and where
there is contract for the sale of unascertained or future goods by description, and
goods of that description and in a deliverable state are unconditionally appropriated to
the contract, either by the seller with the assent of the buyer or by the buyer with the
assent of the seller, the property in the goods thereupon passes to the buyer. Such
assent may be express or implied. Applying the aforesaid law to the facts of the case
in hand, it is clear that Mr. S has the right to select the good out of the bulk and he has
sent his men for same purpose.

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Hence the problem can be answered based on the following two assumptions and the
answer will vary accordingly.
Where the bales have been selected with the consent of the buyer’s representatives:
(i) In this case the property in the 60 bales has been transferred to the buyer and
goods have been appropriated to the contract. Thus loss arising due to fire in case
of 60 bales would be borne by Mr. S. As regards 40 bales, the loss would be borne
by Mr. V, since the goods have not been identified and appropriated.
(ii) Where the bales have not been selected with the consent of buyer’s
representatives:
In this case the property in the goods has not been transferred at all and hence the loss
of 100 bales would be borne by Mr. V completely.
Question 21
Aman contracted to erect machinery on Sapan's premises on the condition that the
price shall be paid on completion of work. During the progress of work the premises
and machinery were destroyed by an accidental fire. Referring to the provisions of the
Sale of Goods Act, 1930, decide whether the parties are bound to perform their
promises and can Aman recover the price of the work actually done? (November 2007)
Answer
Section 8 of the Sale of Goods Act, 1930 states that where there is an agreement to sell
specific goods and subsequently the goods without the fault of seller or buyer perish
before the risk passes to the buyer, the agreement becomes void. In the given case the
premises and machinery get destroyed because of accidental fire before the risk
passes to the buyer and therefore both parties were excused from further performance.
Aman having contracted for an entire work for a specific price to be paid on completion
of work, could not recover any price for the work actually done.
NOTE: The question is on the specific point ie. risk passes on to the buyer with
ownership and more specifically based on the Sale of Goods Act, 1930. Yet, the
question might be answered in accordance with Section 56 of the Indian Contract, 1872
which states that an agreement to do an impossible act in itself is void. A contract to
do an act which, after the contract is made, becomes impossible, or by reason of some
event which the promisor could not prevent, unlawful, becomes void when the act
becomes impossible or unlawful.
Question 22
Under which circumstances can an unpaid seller exercise his right of lien? Distinguish
between right of lien and right of stoppage of goods in transit, under the Sale of Goods
Act, 1930. (November 2007)
Answer
Section 47 of the Sale of Goods Act, 1930 lays down cases in which an unpaid seller is
entitled to lien. They are as follows:
(i) Where goods have been sold without any stipulation as to credit.
(ii) Where goods have been sold on credit but the term of credit expired, or
(iii) Where the buyer becomes insolvent.

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Distinction between right of lien and right of stoppage of goods in transit.:
(1) The essence of a right of lien is to retain possession whereas the right of stoppage
in transit is right to regain possession.
(2) Seller should be in possession of goods under lien while in stoppage in transit (i)
Seller should have parted with the possession (ii) possession should be with a
carrier and (iii) buyer has not acquired the possession.
(3) Right of lien can be exercised even when the buyer is not insolvent but it is not the
case with right of stoppage in transit.
(4) Right of stoppage in transit begins when the right of lien ends. Thus the end of the
right of lien is the starting point of the right of stoppage in transit.
Question 23
A, B and C were joint owners of a truck and possession of the said truck was with B. X
purchased the truck from B without knowing that A and C were also owners of the
truck. Decide in the light of provisions of the Sale of Goods Act, 1930, whether the sale
between B and X is valid or not ? (May 2008)
Answer
Sale by joint owner
This problem is based on Section 28 of the Sale of Goods Act, 1930 which lays down an
exception to the general rule that a person cannot transfer a better title than that he
himself possesses. A person who is one of joint owners may transfer a better title that
he possesses. Section 28 provides that – “if one of several joint owners of goods has
the sole possession of them by permission of the co-owners, the property in goods is
transferred to any person who buys them of such joint owner in good faith and has not
at the time of the contract of sale notice that the seller has not authority to sell”.
The given problem fulfills all such requirements. A, B and C are joint owners of a truck.
B had sole possession of it. In such a case if X has purchased the truck from B in good
faith without notice at the time of sale that B had no authority to sell, then X acquires
good title and becomes full owner although B was not the full owner.
Question 24
Mr. Amit was shopping in a self-service Super market. He picked up a bottle of cold
drink from a shelf. While he was examining the bottle, it exploded in his hand and
injured him. He files a suit for damages against the owner of the market on the ground
of breach of condition. Decide, under the Sale of Goods Act, 1930, whether Mr. Amit
would succeed in his claim?
(May 2008)
Answer
Essentials of Sale
The problem as given in the question is based on Section 16(2) of the Sale of Goods
Act, 1930, which states that where goods are bought by description from a seller who
deals in goods of that description (whether he is the manufacturer or producer or not),
there is an implied condition that the goods shall be of merchandable quality. Though
the term ‘merchandable quality’ is not defined in the Act, it means that in the present
case, the bottle must be properly sealed. In other words, if the goods are purchased for
self-use, they should be reasonably fit for the purpose for which it is being used. In the

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instant case, on an examination of the bottle of cold drink, it exploded and injured the
buyer. Applying the provision of Section 16(2), Mr. Amit would succeed in claim for
damages from the owner of the shop.
Question 25
Ram sells 200 bales of cloth to Shyam and sends 100 bales by lorry and 100 bales by
Railway. Shyam receives delivery of 100 bales sent by lorry, but before he receives the
delivery of the bales sent by railway, he becomes bankrupt. Ram being still unpaid,
stops the goods in transit. The official receiver, on Shyam’s insolvency claims the
goods. Decide the case with reference to the provisions of the Sale of Goods Act,
1930. (November 2008)
Answer
Right of stoppage of goods in transit
The problem is based on section 50 of the Sale of Goods Act,1930 dealing with the right
of stoppage of the goods in transit available to an unpaid seller. The section states that
the right is exercisable by the seller only if the following conditions are fulfilled.
(i) The seller must be unpaid
(ii) He must have parted with the possession of goods
(iii) The goods must be in transit
(iv) The buyer must have become insolvent
(v) The right is subject to the provisions of the Act.
Applying the provisions to the given case, Ram being still unpaid, can stop the 100
bales of cloth sent by railway as these goods are still in transit.
Question 26
B buys goods from A on payment but leaves the goods in the possession of A. A then
pledges the goods to C who has no notice of the sale to B. State whether the pledge is
valid and whether C can enforce it. Decide with reference to the provisions of the Sale
of Goods Act, 1930. (November 2008)
Answer
Pledge by a seller in possession after sale
The problem is based on the provisions of Section 30 (1) of the Sale of Goods Act, 1930
which provides an exception to the general rule that no one can give a better title than
he himself possesses. As per the provisions of the section, if a person has sold goods
but continues to be in possession of them or of the documents of title to them, he may
pledge them to a third person and if such person obtains them in good faith without
notice of the previous sale, he would have good title to them. Accordingly ,C, the
pledgee who obtains the goods in good faith from A without notice of the previous sale,
gets a good title. Thus the pledge is valid.

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3
THE INDIAN PARTNERSHIP ACT, 1932
Question 1
What acts do not fall within the implied authority of a partner under the Indian
Partnership Act, 1932? (Nov. 2002)
Answer
Implied Authority of a partner :
Section 19(1) and 22 of the Indian Partnership Act, 1932 deal with the implied
authority. Accordingly, the act of a partner which is done on, in the usual way, business
of the kind carried on by the firm binds the firm, provided that the act is done in the
firm name or any manner expressing or implying an intention to bind the firm. Such an
authority of a partner binds the firm is called his implied authority.
When implied authority cannot be availed by a partner
Section 19(2) of the Indian Partnership Act, 1932 lays down that, in the absence of any
usage or custom of trade to the contrary, the implied authority of a partner does not
empower him to–
(a) submit a dispute relating to the business of the firm to arbitration.
(b) open a bank account on behalf of the firm in his own name.
(c) compromise or relinquish any claim or portion of a claim by the firm against a third
party.
(d) withdraw a suit or proceeding filed on behalf of the firm.
(e) admit any liquidity in a suit or proceeding against the firm.
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm or
(h) enter into partnership on behalf of the firm.
Some other instances of implied authority are also noteworthy.
(i) a partner has no implied authority to bind the firm by giving a guarantee which is
apparently unconnected with the partnership trade.
(j) he cannot accept shares of a company against the debt due to the firm.
(k) no right of set off his own separate debts against debt due to the firm.
Question 2
Whether a minor may be admitted in the business of a partnership firm? Explain the
rights of a minor in the partnership firm. (Nov. 2002)
Answer

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Minor as a partner :
A minor is incompetent to do the contract and such contract is void-ab-initio (Mohiribibi
vs. Dharam Das Ghose). Therefore, a minor cannot be admitted in the business of the
partnership firm because the partnership is formed on a contract. Though a minor
cannot be a partner in a firm, he can nevertheless be admitted to the benefits of
partnership under section 30 of the Partnership Act, 1932. He may be validly have a
share in the profit of the firm but this can be done with the consent of all the partners
of the firm.
Rights of the minor in the firm :
(i) a minor has a right to his agreed share of the profits and of the firm.
(ii) he can have access to, inspect and copy the accounts of the firm.
(iii) he can sue the partners for accounts or for payments of his share but only, when
severing his connection with the firm, and not otherwise. The amount of share shall
be determined by a valuation made in accordance with the rules upon a dissolution.
(iv) on attaining majority he may within 6 months elect to become a partner or not to
become a partner. If he elects to become a partner, then he is entitled to the share
to which he was entitled as a minor. If he does not, then his share is not liable for
any acts of the firm after the date of the public notice served to that effect.
Question 3
Is it possible for the partners in a firm having majority to expel a partner under the
provisions of the Indian Partnership Act, 1932? Does the firm get dissolved if the
expulsion of a partner is not valid? (May 2003)
Answer
Expulsion of A Partner
According to the provisions of the Indian Partnership Act, 1932 as contained in Section
33, a partner may be expelled from the partnership subject to the following three
conditions:
1. The power of expulsion of a partner should be conferred by the contract between
the partners.
2. The power should be exercised by a majority of the partners.
3. The power should be exercised in good faith which includes interest of partnership,
notice to the partner to be expelled, and an opportunity of being heard. Hence,
mere majority is not enough.
Accordingly, it is possible for the majority of partners in a firm to expel a partner but it
is subject to fulfillment of other conditions as stated above.
It should be noted that the expulsion of partners does not necessarily result in
dissolution of the firm. The invalid expulsion of a partner also does not put an end to
the partnership even if the partnership is at will and it will be deemed to continue as
before. (Jiwan Singh v. Lakshmi Chand AiR (1935) Lh. 332. Dwaraka Das v. Chuni Lal
(1907).
Question 4

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What is the procedure of registration of a partnership firm under the Indian Partnership
Act, 1932 ? What are the consequences of non-registration?(May 2003)
Answer
Registration of a Partnership & Consequences of Non-Registration
Procedure: (Section 58 & 59 Indian Partnership Act, 1932)
The registration of a firm may be effected at any time by filing an application in the
form of a statement, giving the necessary information, with the Registrar of Firms of
the area. The application shall be accompanied by the prescribed fee. It shall also
state:
(a) the name of the firm;
(b) the place or principal place of business of the firm;
(c) the names of other places where the firm carries on business;
(d) the date when each partner joined the firm
(e) the names in full and permanent address of the partners;
(t) the duration of the firm.
The statement shall be signed by all the partners or by their agents specially
authorized in this behalf Section 58(i). It shall also be verified by them in the prescribed
manner (Section 58(2). When the Registrar is satisfied that the above provisions have
been duly complied with, he shall record an entry of the statement in the Register of
Firms and file the statement (Section 59). He shall then issue under his hand a
certificate of registration.
The non-registration of the firm does not affect the following:
1. The right of a firm or partners of a firm having no place of business in India.
2. The right to file any suit or claim of set off exceeding Rs. 100 in value.
3. The right of a partner to sue for the dissolution of the firm, or for the accounts of
the dissolved firm, or for share of the property of the dissolved firm. This disability
of a partner to sue disappears with the dissolution of the firm.
4. The powers of an Official Receiver, Assignee, or Court to realize the property of an
insolvent partner of an unregistered firm.
5. The right of a third party to proceed against an unregistered firm or any of its
partners.
6. The right of an unregistered firm to enforce a right arising otherwise than out of a
contract (Section 69(3) and (4).
Question 5
State the modes by which a partner may transfer his interest in the firm in favour of
another person, under the Indian Partnership Act, 1932. What are the rights of such a
transferee?
(November 2003)
Answer

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Modes by which a partner may transfer his interest entitlements & non
entitlements:
According to Section 29 of the Indian Partnership Act, 1932 a partner may transfer his
interest in the firm by sale, mortgage or charge. The transfer may be absolute or
partial. The transfer does not entitle the transferee, during the continuance of the firm:
(a) to interfere in the conduct of the business of the firm, or
(ii) to require accounts of the firm, or
(iii) to inspect the books of the firm
On transfer of interest by a partner, the transferee only becomes entitled to receive
share of profit of the transferring partner. But in this case also the transferee has to
accept the account of profits agreed to by the partners [Section 29(i)].
If the firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled to receive the transferring partner’s share in the assets of the
firm. For the purpose of ascertaining that share, he is entitled to an account as from
the date of the dissolution (Section 29(2)).
Question 6
What do you understand by “Implied Authority” of a partner? Is such authority subject
to any condition? Which of the acts of a partner come within the implied authority
under the Indian Partnership Act,. 1932? (November 2003)
Answer
Implied Authority of a Partner:
Meaning: Where there is no partnership agreement or where the agreement is silent,
the act of a partner which is done to carry on in the usual way, business of the kind
carried on by the firm, binds the firm (Section 19(1) Indian Partnership Act, 1932). This
authority of a partner to bind the firm by his acts is called implied authority. It is
subject to the following conditions:
1. The act done by the partner must relate to the normal business of the firm.
2. The act must be such as is done within the scope of the business of the firm in the
usual way.
The act must be done in the name of the firm, or in any other manner expressing or
implying an intention to bind the firm (Section 22).
Acts falling within the Implied Authority of a partner:
1. Purchasing goods on behalf of the firm, in which the firm deals or which are
employed in the firm’s business.
2. Selling goods of the firm.
3. Receiving payment of the debt due to the firm and giving receipts for them.
4. Settling accounts with the persons dealing with the firm.
5. Engaging servants for the partnership business.
6. Borrowing money on the credit of the firm.
7. Drawing, accepting, indorsing bills and other negotiable instruments in the
name of the firm.

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8. Pledging any goods of the firm for the purpose of borrowing money.
9. Employing a solicitor to defend an action against the firm for goods supplied.
Question 7
“Mere sharing in the profits of a business is not a conclusive proof of existence of
partnership.”- Comment. (May 2004)
Answer
Sharing of Profit
According to Section 4 of the Indian Partnership Act, 1932, “Partnership is the relation
between persons who have agreed to share the profits of a business carried on by all or
any of them acting for all”. This clearly reveals that sharing of profits of a business is
an important criterion of partnership. But in determining whether it is conclusive
evidence of partnership or not, the regard shall be had to the real relations between
the parties, as shown by all relevant facts taken together. Section 6 of the Indian
Partnership Act, 1932, categorically lays down that receipt by a person of a share of
the profits of a business does not by itself make him a partner with the persons
carrying on the business as there are number of cases where the persons sharing the
profits do not have relationship of partners.
For instance, in the following cases partnership relation does not
exist:-
1. Joint owners of some property in sharing of profits or gross returns arising from the
property.
2. A leader of the firm who receives a share of profit.
3. A widow or child of a deceased partner who receives a share of profit.
4. A servant or agent who receives a share of profit as part of his remuneration.
5. A person who receives a share of profit in consideration of sale of business or
goodwill of the business.
Hence, mere participation in the profits of a trade is not a conclusive evidence of
partnership.
Question 8
Ram, Shyam and Gopal are partners in a firm. Ram retires. Shyam and Gopal continue
to carry on firm’s business in the same “firm name”. Do you agree that in this
situation change in the relationship between partners is involved, but this is not
extinguishment of the existence of the firm itself? Give reasons. (May 2004)
Answer
Effect of Retirement of Partner
As per the provision of Section 39 of the Indian Partnership Act, 1932, “The dissolution
of partnership between all the partners of a firm is called the dissolution of firm.” But
when one or more partner cease to be a partner in a firm, but other continue the
business of partnership, it is called dissolution of partnership. Thus in this case when
Ram retires and Shyam and Gopal continue to carry on firm’s business in the old firm’s
name. The firm in such a case is called a reconstituted firm. Re-constitution of a firm
involves a change in the relation of partner and not the end of the firm.

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Question 9
Explain the provisions of the Indian Partnership Act, 1932 relating to the creation of
Partnership by holding out. Upto what extent such partner will be liable to the
Partnership firm. (November 2004)
Answer
Partnership by ‘Holding Out’
According to Section 28 of the Indian Partnership Act, 1932 “anyone who by words
spoken or written or by conduct represents himself, or knowingly permits himself to be
represented, to be a partner in a firm, is liable as a partner”. The statement includes
with its purview representation by ail possible means enumerated in this section. Thus
the person sought to be charged with liability by holding out must have done
something which amounts to a representation that he was a partner in the business.
This is known as creation of partnership by ‘holding out’.
Extent of liability of a partner by holding out:
(i) A partner by holding out is liable as a partner in the firm to anyone who has on the
faith of, any such representation gives credit to the firm, whether the person
representing himself or represented to be a partner does or does not know that the
representation has reached the person so giving credit [section 28(1)].
(ii) Provisions of section 28 are also applicable to a former partner who has retired
from the firm without giving proper public notice of his retirement. In such case a
person, who, even subsequent to the retirement, gives credit to the firm on behalf
that he was a partner, will be entitled to hold him liable.
(iii) Where after a partner’s death the business is continued in the old firm name, the
continued use of that name or of the deceased partner’s name as a part thereof
shall not be itself make his legal representative or his estate liable for any act of
the firm done after his death [Section 28(2)].
(iv) If a person holds himself out to be the partner of a firm, he becomes personally
liable. He does not become partner of the firm and is not entitled to any rights as
against those who in fact are partners in the firm. By holding out he does not
become an agent of the firm.
Question 10
Describe the provisions of Indian Partnership Act. 1932 regarding the admission of
minor in the partnership firm. State the rights and liabilities of such minor before or
after he attains majority. (November 2004)
Answer
Minor’s Admission into a Partnership Firm: According to Section 11 of the Indian
Contract Act, 1872 an agreement by or with a minor is void (Mohri Bibi Vs. Dharm Das
Ghose). As such, a minor is incapable of entering into a contract of partnership. But
with the consent of all the partners for the time being, a minor may be admitted to the
benefits of partnership [Section 30(1)]. This provision is based on the rule that a minor
cannot be a promisor, but he can be a promisee or a beneficiary.
Position before and on his attaining the age of majority
Position before attaining majority:

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Rights:
1. He has a right to such share of the property and of profits of the firm as may have
been agreed upon.
2. He has a right to have access to and inspect and copy any of the accounts of the
firm but not books. (Section 30(2).
3. When he is not given his due share of profit, he has a right to file a suit for his
share of the property of the firm. But he can do so only if he wants to sever his
connection with the firm. [Section 30(4)].

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Liabilities:
1. The liability of the minor partner is confined only to the extent of his share in the
profits and property of the firm. Over and above this, he is neither personally liable
nor is his private estate liable [Section 30(3)].
2. He cannot be declared insolvent, but if the firm is declared insolvent his share in
the firm vests in the Official Receiver or Official Assignee.
Position on attaining majority:
On attaining majority such a minor has to decide within 6 months whether he shall
continue in the firm or leave it. These six months run from the date of his attaining
majority or from the date when he first comes to know that he had been admitted to
the benefits of partnership whichever date is later. Within this period he should give a
public notice of his choice: (a) to become, or (b) not to become, a partner in the firm.
If he fails to give a public notice, he is deemed to have become a partner in the firm on
the expiry of the said six months. [Section 30(5)].
When such a minor elects to become a partner:
1. He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
2. His share in the property and profits of the firm is the share to which he was
entitled as a minor partner [Section 30(7)].
When such a minor elects not to become a partner:
1. His rights and liabilities continue to be those of a minor up to the date of the notice.
2. His share is not liable for any acts of the firm done after the date of the public
notice.
3. He is entitled to sue the partners for his share or the property and profits in the
firm [Section 30(8)].
Question 11
Describe the procedure of registration of firm under the Indian Partnership Act. What
is the rule of evidence with regard to entries in the Register of firms?
(May 2005)
Answer
The Indian Partnership Act, 1932 provides that registration of firms may be effected at
any time by filing an application in the form of a statement, giving the necessary
information, with the Registrar of Firms of the area. Section 57 of the Act empowers
the State Government to appoint Registrar of Firms for the purposes of the Partnership
Act and defines the areas within which they shall exercise their powers and perform
their duties.
Application for registration of a firm shall be accompanied by the prescribed fee. It
shall state:
(a) the name of the firm;
(b) place or principal place of business of the firm;
(c) names of other places where the firm carries on business;

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(d) date when each partner joined the firm;
(e) names in full and permanent addresses of the partners;
(f) duration of the firm.
The application shall be signed by all the partners or by their agents specially
authorized in this behalf. It shall also be certified by them in the prescribed manner.
When the Registrar is satisfied that the above provisions have been complied, he shall
record an entry in the Registrar of Firms and issue a certification of registration.
Registration takes effect from the date on which the Registrar makes entries in the
Register of Firms.
Any statement, notice or intimation recorded with the Registrar by any person shall be
a conclusive proof against him of any fact therein stated. The third parties can,
however, challenge the fact of statement and prove that it is false and is based on mis-
representation or fraud (Section 68).
Question 12
Ram & Co., a firm consists of three partners A, B and C having one third share each in
the firm. According to A and B, the activities of C are not in the interest of the
partnership and thus want to expel C from the firm. Advise A and B whether they can
do so quoting the relevant provisions of the Indian Partnership Act.
(May 2005)
Answer
Normally it is not possible for the majority of partners to expel a partner from the firm
without satisfying the conditions as laid down in Section 33 of the Indian Partnership
Act, 1932. The essential conditions before expulsion can be done are:
(i) power of expulsion should exist in the partnership deed (contract between the
partners.
(ii) power has been exercised by the majority of the partners in good faith.
The test of good faith includes:
(a) that the expulsion must be in the interest of the partnership;
(b) that the partner to be expelled is served with a notice; and
(c) that the partner has been given an opportunity of being heard.
Thus, in the given case A and B the majority partners can expel the partner only if the
above conditions are satisfied and procedure as stated above has been followed.
Further the invalid expulsion of a partner does not put an end to the partnership and it
will be deemed to continue as before.

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Question 13
State the acts which are considered beyond the implied authority of a partner under
the provisions of the Indian Partnership Act, 1932.
(November 2005)
Answer
According to Section 19 of the Indian Partnership Act, 1932, unless there is usage or
custom of trade to the contrary, the following acts of a partner are considered beyond
his implied authority.
(1) Submit a dispute relating to the business of the firm to arbitration.
(2) Open a bank account on behalf of the firm in his own name.
(3) Compromise or relinquish any claim or portion of a claim by the firm against a third
party (i.e. an outsider).
(4) Withdraw a suit or proceedings filed on behalf of the firm.
(5) Admit any liability in a suit a proceedings against the firm.
(6) Acquire immovable property on behalf of the firm.
(7) Transfer immovable property belonging to the firm.
(8) Enter into partnership on behalf of the firm.
Question 14
When does dissolution of a partnership firm take place under the provisions of the
Indian Partnership Act, 1932? Explain.
(November2005)
Answer
Dissolution of Firm: The Dissolution of Firm means the discontinuation of the jural
relation existing between all the partners of the Firm. But when only one of the
partners retires or becomes in capacitated from acting as a partner due to death,
insolvency or insanity, the partnership, i.e., the relationship between such a partner
and other is dissolved, but the rest may decide to continue. In such cases, there is in
practice, no dissolution of the firm. The particular partner goes out, but the remaining
partners carry on the business of the Firm. In the case of dissolution of the firm, on the
other hand, the whole firm is dissolved. The partnership terminates as between each
and every partner of the firm.
Dissolution of a Firm may take place (Section 39 - 44)
(a) as a result of any agreement between all the partners (i.e., dissolution by
agreement);
(b) by the adjudication of all the partners, or of all the partners but one, as insolvent
(i.e., compulsory dissolution);
(c) by the business of the Firm becoming unlawful (i.e., compulsory dissolution);
(d) subject to agreement between the parties, on the happening of certain
contingencies, such as: (i) effluence of time; (ii) completion of the venture for which
it was entered into; (iii) death of a partner; (iv) insolvency of a partner. In case of
death, it is to be noted that the partners may make a contrary agreement only if

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their number exceeds two. If there are only two partners the only result of either’s
death will necessarily be the dissolution of the firm. This was made clear by the
Supreme Court in Commissioner of Income-tax vs. G.S. Mills.
(e) by a partner giving notice of his intention to dissolve the firm, in case of
partnership at will and the firm being dissolved as from the date mentioned in the
notice, or if no date is mentioned, as from the date of the communication of the
notice; and
(f) by intervention of court in case of: (i) a partner becoming the unsound mind; (ii)
permanent incapacity of a partner to perform his duties as such; (iii) Misconduct of
a partner affecting the business; (iv) willful or persistent branches of agreement by
a partner; (v) transfer or sale of the whole interest of a partner; (vi) improbability of
the business being carried on save at a loss; (vii) the court being satisfied on other
equitable grounds that the firm should be dissolved.
Question 15
Ram, Mohan and Gopal were partners in a firm. During the course of partnership, the
firm ordered Sunrise Ltd. to supply a machine to the firm. Before the machine was
delivered, Ram expired. The machine, however, was later delivered to the firm.
Thereafter, the remaining partners became insolvent and the firm failed to pay the
price of machine to Sunrise Ltd.
Explain with reasons:
(i) Whether Ram’s private estate is liable for the price of the machine purchased by
the firm?
(ii) Against whom can the creditor obtain a decree for the recovery of the price?(May
2006)
Answer
Partnership Liability: The problem in question is based on the provisions of the
Indian Partnership Act, 1932 contained in Section 35. The Section provides that where
under a contract between the partners the firm is not dissolved by the death of a
partner, the estate of a deceased partner is not liable for any act of the firm done after
his death. Therefore, considering the above provisions, the problem may be answered
as follows:
(i) Ram’s estate in this case will not be liable for the price of the Machinery purchased.
[Bagel Vs. Willer]
(ii) The creditors in this case can have only a personal decree against the surviving
partners and decree against the partnership assets in the hands of those partners.
However, since the surviving partners are already insolvent, no suit for recovery of
the debt would lie against them. A suit for goods sold and delivered would not lie
against the representative of the deceased partner. This is because there was not
debt due in respect of the goods in Ram’s life time. [Bagel vs. Willer].
Question 16
When is the registration of a Partnership firm deemed to be complete under the Indian
Partnership Act, 1932? What are the consequences when a partnership firm is not
registered?

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(May
2006)
Answer
Registration of firm: Registration of a partnership firm is affected by delivering to
the Registrar of Firms, a statement in the prescribed form accompanied by the
prescribed fee (Section 58 of the Indian Partnership Act). The act of the party by way
of presentation of Statement under Section 58 makes registration effective; whereas
the Act of the Registrar in recording an entry of the statement in the Registrar of the
Firms is only a clerical act (Jayalakshmi R&O M vs. Income Tax commissioner).
The effects of non-registration of a firm as contained in section 69 are as follows:
1. Suits between Partners & Firm [Section 69 (1)] A partner of an unregistered firm
cannot sue the firm or any partner of the firm to enforce a right arising from a
contract or conferred by the Partnership Act. He can do so if (i) the firm is
registered and (ii) the person suing is or has been shown in the Registrar of Firms
as a partner in the firm.
2. Suits between Firm and third parties [Section 69(2)] An unregistered firm cannot
sue a third party to enforce a right arising from a contract.
3. Claim of set-off [Section 69(3)]: An unregistered firm or any partner thereof cannot
claim a set-off in a proceeding instituted against the firm by a third party to enforce
a right arising from a contract until the registration of the firm is effected. This right
of set-off, however, is not affected if the claim of set-off is less than Rs. 100 in
value [Section 69(4)(b)].
Question 17
A, B and C are partners in a firm. A introduces D to X as a partner in business. D,
infact, was not a partner in the firm’s business. D did not deny this statement. X
advanced a loan of Rs. 20 lakhs to the firm. Firm’s failure to repay the loan X want to
hold D responsible for the repayment of the above loan. Referring to the provisions of
the Indian Partnership Act, 1932 decide whether X would succeed in recovering the
loan from D. (November 2006)
Answer
Yes, X can hold D responsible for the repayment of loan as he is the partner by
Estopple or by holding out. Section 28(1) Indian Partnership Act, 1932 lays down this
principle as follows: “Anyone who by words spoken or written or by conduct represents
himself, or knowingly permits himself to be represented, to be a partner in a firm, is
liable as a partner in that firm to anyone who has on the faith of any such
representation given credit to the firm, whether the person represented to be a partner
does or does not know that representation has reached the person so giving credit.”
Hence D becomes a partner by holding out as he did not deny the statement given by
A. Hence D is liable to make repayment of loan.
Question 18
“Sharing of profits is only a prima facie not a conclusive evidence of the existence of
partnership.” Examine the validity of the statement in the light of the provisions of the
Indian Partnership Act, 1932 and state as to how would you determine whether a group
of persons does or does not constitute partnership.
(November 2006)

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Answer
It is true that sharing of profits of business is an essential element to constitute a
partnership. But it is only a prima facie evidence but not a conclusive evidence of the
existence of partnership. It is also true that the partners agree to share the profits of a
business which is carried on by all or by one of them acting for all. However, the
sharing of profits would not by itself make such person partner with the persons
carrying on a business. Sharing of profits by the following person will not make them
partners in the partnership firm:
(i) by a lender of money to persons engaged or about to engage in any business;
(ii) by a servant or agent as remuneration.
(iii) by widow or child or a deceased partner as annuity, or
(iv) by a previous owner or part owner of the business as consideration for the sale of
goodwill or share thereof.
To determine whether a group of persons running a business does or does not
constitute partnership, Section 6 of the India Partnership Act, 1932 has to be referred.
According to Section 6 “In determining whether a group of persons is or is not firm,
regard shall be had to the real relation between the parties as shown by all relevant
facts taken together. It is very clear from this that in determining relationship between
parties and ascertaining the existence of partnership all relevant facts such as follows
are to be considered –
(i) There must be an agreement between two or more persons
(ii) There must be a business of partnership
(iii) The partners must have agreed to share the profits of business
(iv) The business must be carried on by all or any one of them acting for all. In other
words there must be mutual agency between the partners. Existence of mutual
agency which is the cardinal principle of partnership law, is very much helpful in
reaching a conclusion in this regard. In this situation each partner is the principal
as well as agent of the other partners.
Hence, in order to determine whether the relation of partnership exists between two or
more persons or not, one should examine all the facts and circumstances as cited
above.
Question 19
A and B entered into an agreement to carry on a business of manufacturing and selling
toys. Each one of them contributed Rs. 35 lacs as their capital with a condition that A
and B will share the profits equally, but the loss, if any is to be borne by A alone.
Referring to the provisions of the Indian Partnership Act, 1932 decide whether there
exists a partnership between A and B. (May 2007)
Answer
Yes, it is a case of partnership between A and B as sharing losses is not an essential
condition to create a partnership. Section 13(b) of the Indian Partnership act 1932
provides Subject to the contract between the partners, the partners are entitled to
share equally in the profits earned, and shall contribute equally to the losses sustained
by the firm.” In the given case the partners make a contract contrary to this provision
where A agrees to bear all the losses of the business.

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Question 20
A, B and C are partners in a firm called ABC Firm. A, with the intention of deceiving D,
a supplier of office stationery, buys certain stationery on behalf of the ABC Firm. The
stationery is of use in the ordinary course of the firm’s business. A does not give the
stationery to the firm, instead brings it to his own use. The supplier D, who is unaware
of the private use of stationery by A, claims the price from the firm. The firm refuses
to pay for the price, on the ground that the stationery was never received by it (firm).
Referring to the provisions of the Indian Partnership Act, 1932 decide:
(i) Whether the Firm’s contention shall be tenable ?
(ii) What would be your answer if a part of the stationery so purchased by A was
delivered to the firm by him, and the rest of the stationery was used by him for
private use, about which neither the firm nor the supplier D was aware? (May
2007)
Answer
The problem in the question is based on the ‘Implied Authority’ of a partner provided in
Section 19 of the Indian Partnership Act 1932. The section provides that subject to the
provisions of Section 22 of the Act, the act of a partner, which is done to carry on, in
the usual way, business of the kind carried on by the firm, binds the firm. The authority
of a partner to bind the firm conferred by this section is called his ‘Implied Authority’
[Sub-Section (i) of section 19]. Furthermore, every partner is in contemplation of law
the general and accredited agent of the partnership and may consequently bind all the
other partners by his acts in all matters which are within the scope and object of the
partnership Hence, if the partnership is of a general commercial nature, he may buy
goods on account of the partnership.
Considering the above provisions and explanation, the questions as asked in the
problem may be answered as under:
(i) The firm’s contention is not tenable, for the reason that the partner, in the usual
course of the business on behalf of the firm has an implied authority to bind the
firm. The firm is, therefore, liable for the price of the goods,
(ii) In the second case also the answer would be the same as above, i.e. the implied
authority of the partner binds the firm.
In both the cases, however, the firm ABC can take action against A, the partner but it
has to pay the price of stationery to the supplier D.
Question 21
Abhinav buys certain goods worth Rs. 50,000 from an unregistered firm Ram & Sons. Ram
& Sons has to pay Rs. 60,000 to Abhinav for the goods purchased by the firm in the past.
Referring to the provisions of the Indian Partnership Act, 1932 decide whether Ram & Sons
can compel Abhinav to accept Rs. 10,000 i.e. the difference between Rs. 60,000 and
50,000 as the final settlement?
(November 2007)
Answer
Section 69 of the Indian Partnership Act, 1932 provides that an unregistered firm can
not claim a set off exceeding Rs. 100 in value. In the given case the difference between
Rs. 60,000 and 50,000 is of Rs. 10,000 for which the right of set off is not available.

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Therefore, Ram & Sons can not compel Abhinav to accept Rs. 10,000 as the final
settlement.
Question 22
"Implied authority of a partner can be extended or restricted”. Discuss the above
statement in the light of the provisions of the Indian Partnership Act, 1932. How far, are
third parties affected by restrictions placed on such implied authority? (November 2007)
Answer
Section 19 (2) of the Indian Partnership Act, 1932, provides that the act of a partner
which is done to carry on the usual way, business of the kind carried on by the firm
bind the firm, provided the act is done in the firm's name or in any manner expressing
or implying an intention to bind the firm. The implied authority of a partner extends
only to such acts which are common in the type of business carried on by the firm and
are done by him in usual way of carrying on the firm's business. Thus, if it is usual to
give credit to customers, in a particular business, the giving of credit by a partner to a
customer will bind the firm. However, if a usual act is done in an unusual manner, this
must raise a suspicion as to the authority of a partner and the protection on the ground
of implied authority may not the available.
Question 23
What do you mean by “implied authority” of the partners in a firm? Point out the extent of
partner’s implied authority in case of emergency, referring to the provisions of the Indian
Partnership Act, 1932. (May 2008)
Answer
Implied authority of partner
As per Section 19 of the Indian Partnership Act, 1932 “Subject to the provisions of
Section 22, the act of a partner which is done to carry on, in the usual way, the
business of the kind carried on by the firm binds the firms”. The authority of a partner
to bind the firm conferred by this section is called his ‘implied authority’. Section 21 of
the Act provides that a partner has authority in an emergency to do all such act for the
purpose of protecting the firm from the loss as would be done by a person of ordinary
prudence, in his own case, acting under similar circumstances, and such acts bind the
firm. Conditions for the authority of a partner in an emergency:
(i) The act should be done by the partner in an emergency
(ii) The act of the partner should be for the purpose of protecting the firm from loss.
(iii) The act should be, as a person of ordinary prudence would do in his own case.
(iv) Such an act should bind the firm.
To protect the firm, a partner has an authority to do all such acts in emergency to save
the firm from loss. It may be noticed that the powers of a partner to act in an
emergency are similar to those of an agent in similar circumstances under Section 139
of the Indian Contract Act, 1872.
Question 24
A, B and C are partners in a firm. As per terms of the partnership deed, A is entitled to
20 percent of the partnership property and profits. A retires from the firm and dies
after 15 days. B and C continue business of the firm without settling accounts. What
are the rights of A’s legal representatives against the firm under the Indian Partnership
Act, 1932? (May 2008)

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Answer
Retirement / Death of Partner
Section 37 of the Indian Partnership Act, 1932 provides that where a partner dies or
otherwise ceases to be a partner and there is no final settlement of account between
the legal representatives of the deceased partner or the firms with the property of the
firm, then, in the absence of a contract to the contrary, the legal representatives of the
deceased partner or the retired partner are entitled to claim either.
(i) Such shares of the profits earned after the death or retirement of the partner which
is attributable to the use of his share in the property of the firm; or
(ii) Interest at the rate of 6 per cent annum on the amount of his share in the property.
Based on the aforesaid provisions of Section 37 of the Indian Partnership Act, 1932 A,
in the given problem, A shall be entitled, at his option to:
(i) the 20% shares of profits (as per the partnership deed); or
(ii) interest at the rate of 6 per cent per annum on the amount of A’s share in the
property.
Question 25
Mahesh, Suresh and Dinesh are partners in a trading firm. Mahesh, without the
knowledge or consent of Suresh and Dinesh borrows himself Rs. 50,000 from Ramesh,
a customer of the firm, in the name of the firm. Mahesh, then buys some goods for his
personal use with that borrowed money. Can Mr. Ramesh hold Mr. Suresh & Mr. Dinesh
liable for the loan? Explain the relevant provisions of the Indian Partnership Act,1932.
(November 2008)
Answer
Implied authority of a partner
Yes, as per sections 19 and 22 of the Indian Partnership Act,1932 unless otherwise
provided in the partnership deed, every partner has an implied authority to bind every
other partner for acts done in the name of the firm, provided the same falls within the
ordinary course of business and is done in a usual manner. Mahesh has a right to
borrow the money of Rs. 50,000/- from Ramesh on behalf of his firm in the usual
manner. Since, Ramesh has no knowledge that the amount was borrowed by Mahesh
without the consent of the other two partners, Mr. Suresh and Mr. Dinesh, he can hold
both of them (Suresh and Dinesh) liable for the re-payment of the loan.
Question 26
Anil and Sunil purchased a lorry to ply it in partnership. They plied the lorry for about
two years when Anil, without the consent of Sunil, disposed of the lorry. Sunil brought
an action to recover his share in the sale proceeds. Anil resisted Sunil’s claim on the
plea that the firm was not registered. Will Sunil succeed in his claim? Decide with
reference to the provisions of the Indian Partnership Act, 1932.(November 2008)
Answer
Effect of non-registration

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The problem is based on the provisions of Section 69 of the Indian Partnership Act. As
per this section a partner of an unregistered firm is excluded from bringing legal action
against the firm or any person alleged to be or to have been a partner in the firm. But
such a person may sue for dissolution of the firm or for accounts and realisation of his
share in the firm’s property where the firm is dissolved. Applying these provisions,
Sunil will succeed in his claim as the business had been closed on the sale of the lorry,
and the action now was for the realisation of the assets of a dissolved firm.

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4
∗
THE NEGOTIABLE INSTRUMENTS ACT, 1881
Question 1
State briefly the rules laid down under the Negotiable Instruments Act for determining
the date of maturity of a bill of exchange. Ascertain the date of maturity of a bill
payable hundred days after sight and which is presented for sight on 4th May, 2000.
(May 2000)
Answer
Calculation of maturity of a Bill of Exchange: The maturity of a bill, not payable on
demand, at sight, or on presentment, is at maturity on the third day after the day on
which it is expressed to be payable (Section 22, para 2 of Negotiable Instruments Act,
1881). Three days are allowed as days of grace. No days of grace are allowed in the
case of bill payable on demand, at sight, or presentment.
When a bill is made payable at stated no. of months after date, the period stated
terminates on the day of the month which corresponds with the day on which the
instrument is dated. When it is made payable after a stated number of months after
sight the period terminates on the day of the month which corresponds with the day on
which it is presented for acceptance or sight or noted for non-acceptance or protested
for non-acceptance. When it is payable a stated no- of months after a certain event, the
period terminates on the day of the month which corresponds with the day on which
the event happens (Section 23).
When a bill is made payable a stated number of months after sight and has been
accepted for honour, the period terminates with the day of the month which
corresponds with the day on which it was so accepted.
If the month in which the period would terminate has no corresponding day, the period
terminates on the last day of such month (Section 23).
In calculating the date a bill made payable a certain no. of days after date or after sight
or after a certain event is at maturity, the day of the date, or the day of presentment
for acceptance or sight or the day of protest for non-accordance, or the day on which
the event happens shall be excluded (Section 24).
Three days of grace are allowed to these instruments after the day on which they are
expressed to be payable (Section 22).
When the last day of grace falls on a day which is public holiday, the instrument is due
and payable on the preceding business day (Section 25).
Answer to Problem: In this case the day of presentment for sight is to be excluded
i.e. 4th May, 2000. The period of 100 days ends on 12th August, 2000 (May 27 days +
June 30 days + July 31 days + August 12 days). Three days of grace are to be added. It
falls due on 15th August, 2000 which happens to be a public holiday. As such it will fall

Updated as per the Negotiable Instruments (Amendments & Miscellaneous Provision) Act, 2002.

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due on 14th August, 2000 i.e. the preceding business day.
Question 2
Distinguish between inland and foreign bills. (May 2000)
Answer
Inland Bills are drawn in India on a person residing in India, payable any
where or drawn in India on a person residing outside India payable in
India while a foreign bill is a bill which is not inland bill. Foreign bills are
drawn and payable outside India or drawn in India and payable outside
India or drawn in India upon persons resident outside India and made
payable outside India. Foreign bills may be of five kinds: (i) bill drawn in
India on a person resident outside India and made payable outside India
(ii) bill drawn outside India and made payable in India (iii) bill drawn
outside India on any person resident outside India (iv) bill drawn outside
India on a person resident in India (v) bill drawn outside India are made
payable outside India.
Inland bills are drawn in a single copy but foreign bills are drawn in triplicate.
In Inland bills, dishonour requires noting. Protest is optional, but in foreign
bills, dishonour requires protesting, (Section 11 & 12, Negotiable
Instruments Act, 1881].
Question 3
X, a major, and M, a minor, executed a promissory note in favour of P. Examine with
reference to the provisions of the Negotiable Instruments Act, the validity of the
promissory note and whether it is binding on X and M. (May 2000)
Answer
Minor being a party to negotiable instrument: Every person competent to
contract has capacity to incur liability by making, drawing, accepting, endorsing,
delivering and negotiating a promissory note, bill of exchange or cheque (Section 26,
para 1, Negotiable Instrument Act, 1881).
As a minor’s agreement is void, he cannot bind himself by becoming a party to a
negotiable instrument. But he may draw, endorse, deliver and negotiate such
instruments so as to bind all parties except himself (Section 26, para 2).
In view of the provisions of Section 26 explained above, the promissory note executed
by X and M is valid even though a minor is a party to it. M, being a minor is not liable;
but his immunity from liability does not absolve the other joint promisor, namely X from
liability [Sulochana v. Pandiyan Bank Ltd., AIR (1975) Mad. 70].
Question 4
Explain the essential elements of a Promissory note. State, giving reasons, whether the
following instruments are valid Promissory notes:
(i) X promises to pay Y, by a Promissory note, a sum of Rs. 5,000, fifteen
days after the death of B.
(ii) X promises to pay Y, by a Promissory note, Rs. 5000 and all other sums,
which shall be due. (November, 2000)

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Answer
Essential Elements of a Promissory Note:
1. must be in writing.
2. Promise to pay: The instrument must contain an express promise to pay.
3. Definite and unconditional: The promise to pay must be definite and
unconditional. If it is uncertain or conditional, the instrument is invalid.
4. Signed by she maker: The instrument must be signed by the maker,
otherwise it is incomplete and of no effect. Even if it is written by the
maker himself and his name appears in the body of the instrument, his
signature must be there. An agent of a trading firm can sign a promissory
note on behalf of the firm- (Meenakshi v. Chettiar).
5. Certain parties: The instrument must point out with certainty as to who
the maker is and who the payee is. When the maker and the payee cannot
be identified with certainty from the instrument itself, the instrument,
even if it contains an unconditional promise to pay, is not a promissory
note.
6. Certain sum of money: The sum payable must be certain and must not be
capable of contingent additions or subtractions,
7. Promise to pay money only: The payment must be in the legal tender
money of India.
Answer to Problem: In the case number 1, the payment to be made is fifteen days
after the death of B. Though the date of death is uncertain, it is certain that B shall die.
Therefore the instrument is valid.
In the second case- the sum payable is not certain within the meaning of Section 4 of
the Negotiable Instruments Act, 1881- Hence the Promissory Note is not a valid one.
Question 5
Mr. Clever obtains fraudulently from J a cheque crossed ‘Not Negotiable 1. He later
transfers the cheque to D, who gets the cheque encashed from ABC Bank, which is not
the Drawee Bank. J, OH comics to know about the fraudulent act of Clever, sues ABC
Bank for the recovery of money. Examine with reference to the relevant provisions of
the Negotiable Instruments Act, 1881, whether J will be successful in his claim. Would
your answer be still the same in case Clever does not transfer the cheque and gets the
cheque encashed from ABC Bank himself? (November 2000)
Answer
According to Section 130 of the Negotiable Instrument Act, 1881 a person taking chequ
crossed generally or specially bearing in either case the words ‘Not Negotiable’ shall
not have or shall not be able to give a better title to the cheque than the title the
person from who he took had. In consequence, if the title of the transfereor is
defective, the title of the transferee would be vitiated by the defect.
Thus based on the above provisions, it can be concluded that if the holder has a good
title, he can still transfer it with a good title, but if the transferor has a defective title,
the transferee is affected by such defects, and he cannot claim the right of a holder in
due course by proving that he purchased the instrument in good faith and for value. As
Mr. Cleaver in the case in question had obtained the cheque fraudulently, he had no

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title to it and could not give to the bank any titile to the cheque or money; and the
bank would be liable for the amount of the cheque for encashment. (Great Western
Railway Co. v. London and Country Banking Co.)
The answer in the second case would not change and shall remain the same for the
reasons given above.
Thus J in both the cases shall be successful in his claim from ABC bank.
Question 6
In what way ‘Discharge of a party’ to a nagotiable instrument differ from the ‘Discharge
of instrument’. Explain the different modes of discharge of a negotiable instrument
under the Negotiable Instruments Act. 1881. (November 2000)
Answer
Discharge of a Party to a Negotiable Instrument etc: An instrument is said to be
discharged only when the party who is ultimately liable thereon is discharged from
liability. Therefore, discharge of a party to an instrument does not discharge (he
instrument itself. Consequently, the holder in due course may proceed against the
other panics liable for me instrument. For example; the endorser of a bill may be
discharged from his liability, but even then acceptor may be proceeded against. On the
other hand, when a bill has been discharged by payment, all lights thereunder are
extinguished even a holder in due course cannot claim any amount under the bill.
Discharge of an Instrument:
1. ‘By payment in due course: The. instrument is discharged by payment
made in due course by the party who is primarily liable to pay, or by a
person who is accommodated in case the instrument was made or
accepted for his accommodation, The payment must be made at or after
the maturity to the holder of the instrument if the maker or acceptor is to
be discharged. A payment by a party who is secondarily liable does not
discharge the instrument.
2. By party primarily liable by becoming holder (Section 90): If the maker of
a note or the acceptor of a bill becomes its holder at or after its maturity
in his own right, the instrument is discharged.
3. By express waiver: When the holder of a negotiable instrument at or after
its maturity absolutely and unconditionally renounces in writing or gives
up his rights against all the parties to the instrument, the instrument is
discharged. The renunciation must be in writing unless the instrument is
delivered upto the party primarily liable.
4. By Cancellation: Where an instrument is intentionally cancelled by the
holder or his agent and the cancellation is apprent thereon, the
instrument is discharged. Cancellation may take place; by crossing out
signatures on the instrument, or by physical destruction of the instrument
with the intention of putting an end to the liability of the parties to the
instrument.
5. By discharge as a simple contract: A negotiable instrument may be
discharged in rile same way as any other contract for the payment of
money. This includes for example, discharge of an instrument by novation
or rescission or by expiry of period of limitation.

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Question 7
Who is a holder in due course of a Negotiable Instrument? In what respects does he
differ from a holder? (November, 2000)
Answer
Holder In Due Course: It means any person who, for consideration became its
possessor before the amount mentioned in it became payable. In the case of an
instrument payable to order, 'holder in due course' means any person who became the
payee or endorsee of the instrument before the amount mentioned in it became
payable. In both the cases, he must receive the instrument without having sufficient
cause to believe that any defect existed in the title of the person from whom he
derived his title. In other words, holder in due course means a holder who takes the
instrument bona fide for value before it is overdue, and without any notice of defects in
the title of the person, who transferred it to him. Thus a person who claims to be
'holder in due course' is required to prove that:
1. on paying a valuable consideration, he became either the possessor of the
instrument if payable to order;
2. he had come into the possession of the instrument before the amount due
thereunder became actually payable; and
3. he had come to possess the instrument without having sufficient cause to
believe that any defect existed in the title of transferor's from whom
derived his title.
Distinction between Holder & Holder in Due Course:
1. A holder may become the-possessor or payee of an instrument even
without consideration, whereas a holder in due course is one who acquires
possession for consideration.
2. A holder in due course as against a holder, must become the possessor
payee of the instrument before the amount thereon become payable.
3. A holder in due course as against a holder, must have become the payee of
the instrument in good faith i.e., without having sufficient cause to believe
that any detect existed in-the transferor's title.
Question 8
Comment on the following statement with reference to the provisions Negotiable
Instruments Act. 1881: “Once a bearer instrument always a bearer instrument.” (May
2001)
Answer
A bearer instrument is one, which can change hands by mere delivery of the
instrument. The instrument may be a promissory note or a bill of exchange, or a
cheque. It should be expressed to be so payable or on which the last endorsement is in
blank. (Explanation 2 to Section 13 of the Negotiable Instrument Act 1881).
Under Section 46 where an instrument is made payable to bearer, it is transferable
merely by delivery, i.e. without any further endorsement thereon. But this character of
the Instrument can be subsequently altered. Section 49 provides that a holder of
negotiable instrument endorsed in blank (i.e. bearer) may, without signing his own

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name, by writing above the endorser’s signature, direct that the payment of the
instrument be made to another person. Thus the character of the instrument is
changed and the instrument cannot be negotiated by mere delivery.
But in the case of a Cheque, however, the law is a little different from the one stated
above. According to the provisions of Section 85 (2) where a cheque is originally
expressed to be payable to bearer, the drawee is discharged by payment in due course
to the bearer thereof, despite any endorsement whether in blank or full appearing
thereon not with standing that any such instrument purported to restrict or exclude
further negotiation. In other words, the original character of the cheque is not altered
so far as the paying bank is concerned, provided the payment is made in due course.
Hence the proposition that once a bearer instrument always a bearer instrument.
Question 9
Promissory note dated 1st February, 2001 payable two months after dale was presented
to the maker for payment 10 days after maturity. What is the date of Maturity? Explain
with reference to the relevant provisions of the ‘Negotiable Instruments Act, 1881
whether the endorser and the maker will be discharged by reasons of such delay.
(May 2001)
Answer
Delay in presentment for payment of a promissory note: If a promissory role is
made payable a stated number of months after date, it becomes payable three days
after the corresponding date of months after the stated number of months (Section 23
read with Section 22 Negotiable Instruments Act 1881). Therefore- in this case the date
of maturity of the promissory note is 4th April, 2001.
In this case the promissory note was presented for payment 10 days after maturity.
According to Section 64 of Negotiable Instruments Act read with Section 66, a
promissory note must be presented for payment at maturity by on behalf of the holder.
In default of such presentment, the other parties the instrument (that is, parties other
than the parties primarily liable) are not liable to such holder. The indorser is
discharged by the delayed presentment for payment. But the maker being the primary
party liable on the instrument continues to be liable.
Question 10
X by inducing Y obtains a Bill of Exchange from him fraudulently in his (X) favour.
Later, he enters into a commercial deal and endorses the bill to Z towards
consideration to him (Z) for the deal. Z takes the bill as a Holder-in-due-course. Z
subsequently endorses the bill to X for value, as consideration to X for some other deal.
On maturity the bill is dishonoured. X sues Y for the recovery of the money.
With reference to the provisions of the Negotiable Instruments Act, decide whether X
will succeed in the case ? (May 2001)
Answer
The problem stated in the question is based on the provisions of the Negotiable
Instruments Act as contained in Section 53. The section provides: ‘Once a negotiable
instrument passes through the hands of a holder in due course, it gets cleansed of its
defects provided the holder was himself not a party to the fraud or illegality which
affected the instrument in some stage of its journey. Thus any defect in the title of the

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transferor will not affect the rights of the holder in due course even if he had
knowledge of the prior defect provided he is himself not a party to the fraud. (Section
53).
Thus applying the above provisions it is quite clear that X who originally induced Y in
obtaining the bill of exchange in question fraudulently, cannot succeed in the case. The
reason is obvious as X himself was a party to the fraud.
Question 11
Explain clearly the meaning of the term ‘Promissory’ Note as provided in the
Negotiable Instruments Act, 1881. In what way does a ‘Promissory Note’ differ from a
‘Bill of Exchange’?
(November,
2001)
Answer
Meaning of promissory note & distinction with bill of exchange:
A promissory note is an instrument in writing (not being a bank note or a currency
note) containing an unconditional undertaking, signed by the maker, to pay a certain
sum of money only to, or to the order of a certain person, or the bearer of the
instrument. (Section 4: The Negotiable Instruments Act, 1881).
DISTINCTION:
1. There are two parties in a Promissory Note – maker and the payee. In a
bill there are three parties - the drawer, the drawee and the payee.
2. Promissory Note contains an unconditional promise to pay. A Bill of
Exchange contains an unconditional older to pay.
3. Maker of a note is the debtor and he himself undertakes to pay. The
drawer of a bill is the creditor who directs the drawee (his debtor) to pay.
4. Maker of a note corresponds in general to the acceptor of a bill. But the
maker of the note cannot undertake to pay conditionally whereas the
acceptor may accept the bill conditionally because he is not the originator
of the bill.
5. The liability of a maker of a note is primary and absolute, whereas the
liability of the drawer of a bill is secondary and conditional (Section 30
and 32);
6. A note cannot be made payable to the maker himself, whereas in a bill the
drawer and the payee may be one and the same person.
7. A note requires no acceptance and it is signed by the person who is liable
to pay. A bill payable after sight or after a certain period must be
accepted by the drawee before it is presented for payment.
8. A note cannot be drawn payable to bearer. A bill can be so drawn. But in
no case can a note or bill be drawn ‘payable to bearer on demand’.
9. The maker of a note stands in immediate relation with the payee, the
drawer of a bill stands in immediate relation with the acceptor and not
the payee. (Explanation to Section 44)

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10. Certain provisions like presentment for acceptance (Section 61),
acceptance (Section 75), acceptance for honour (Section 108), and bill in
sets (Section 132) apply to bills but not to notes.
Question 12
What is a ‘Sans Recours’ indorsement? A bill of exchange is drawn payable to X or
order. X indorses it to Y, Y to Z, Z to A.A to B and B to X. State with reasons whether X
can recover the amount of the bill from Y. Z, A and B, if he has originally indorsed the
bill to Y by adding the words ‘Sans Recours. (November 2001)
Answer
Meaning of Sans Recours Endorsement: It is a type of endorsement on a
Negotiable Instrument by which the endorser absolves himself or declines to accept
any liability on the instrument of any subsequent party. The endorser signs the
endorsement putting his-signature along with the words, SANS RECOURS.
In the problem X, the endorser becomes the holder after it is negotiated to several
parties. Normally, in such a case, none of the intermediate parties is liable to X. Tills is
to prevent ‘circuitry of action’. But in this case X’s original endorsement is ‘without
recourse’ and therefore, he is not liable co Y, Z, A and B. But the bill is negotiated back
to X, all of them are liable to him and he can recover the amount from all or any of
them (Section 52 para 2).
Question 13
Explain the meaning of the term ‘Holder’ under Negotiable Instruments Act, 1881.
State the privileges of a ‘Holder in due course’. (November 2001)
Answer
Meaning of holder under the Negotiable Instrument Act, 1881 and the
privileges of a holder in due course:
The ‘holder’ of a negotiable instrument means any person entitled in his own name:
(i) to the possession thereof, and
(ii) to receive or recover the amount due thereon from the parties threat.
Where the instrument is lost or destroyed, its holder is the person so entitled at the
lime of such loss of destruction.
Privileges of a Holder in Due Course:
1. A person signing and delivering to another a stamped but otherwise
inchoate instrument is debarred from asserting, as against a holder in
due course, that the instrument has not been filled in accordance with
the authority given by him, the stamp being sufficient to cover the
amount, (Section 20).
2. In case of a bill of exchange is drawn payable to the drawer’s order in a
fictitious name and is endorsed by the same hand as the drawer’s
signature, it is not permissible for acceptor to allege as against the
holder in due course mat such name is fictitious. (Section 42).
3. In case of a bill or note is negotiated to a holder in due course, the other
parties to the bill or note cannot avoid liability on the ground that the

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delivery of the instrument was conditional or for a special purpose only
(Section 42 and 47).
4. The person liable in a negotiable instrument cannot set up against the
holder in due course the defences that the instrument had been lost or
obtained from the former by means of an offence or fraud or for an
unlawful consideration (Section 58).
5. ‘No maker of a promissory note, and no drawer of a bill or cheque and no
acceptor of a bill for the honour of the drawer shall, in a suit thereon by a
holder in due course he permitted to deny the validity of the instrument
as originaity made or drawn. (Section 120).
No maker of a promissory note and no acceptor of a bill payable to order shall, in a suit
thereon by a holder in due course, be permitted 10 deny the payee’s capacity at the
date of the note or bill, to endorse the same (Section 121). In short, a holder in due
course gets a good title to the bill.
Question 14
Define a Bill of Exchange as per the Negotiable Instruments Act, 1881 and explain its
salient features. (May, 2002)
Answer
Section 5 of the Negotiable Instruments Act, 1881, defines a Bill of Exchange as under:
“A bill of exchange is an instrument in writing containing an unconditional order, signed
by, the maker, directing a certain person to pay a certain sum of money only to, or to
the order of a certain person or to the bearer of the instrument.
Example: ‘A’ wrote and signed an instrument ordering ‘B’ to pay Rs.500 to ‘C’ This is a
Bill of Exchange.
Another example of a valid Bill of Exchange is :
“On demand pay to ‘A’ or order the sum of rupees five hundred for value received.”
In this case although the bill of exchange is payable on demand, but it is payable to a
Specified person (i.e. A) or his order (i.e. to a person to whom ‘A: requires to be paid),
and, therefore, it is a valid bill of exchange.
Salient features of a Bill of Exchange:
The essential requirements of a Bill of Exchange, may be stated briefly as below
(1) The bill of exchange must be in writing. It should not be oral one.
(2) The bill of exchange must contain an express order to pay.
(3) The order to pay must be unconditional. The order to pay must not
depend upon a condition or on happening or an uncertain event.
(4) It must contain an order to pay in terms of money only.
(5) It must contain an order to pay a definite (i.e. certain) amount of money.
(6) The parties to a bill of exchange must be certain. Usually there are three
parties to a bill of exchange, money drawer, drawee and payee. However,
in some cases drawer and drawee may be same persons.
(7) It must be signed by the drawer.
(8) Intention to make a bill of exchange and its delivery are other additional

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requirements. It must be delivered to the payee. Otherwise it will be an
inchoate instrument.
Question 15
When is an alteration of an instrument treated as a material alteration under the
Negotiable Instruments Act, 1881? What is the effect of such an alteration?
(November 2001, May 2002)
Answer
Material alteration: An alteration is material which—
(i) alters the character or identity of the instrument/or which shakes the very
foundation of the instrument, or
(ii) changes the rights and liabilities of the parties, any of the parties to the
instrument; or
(iii) alters the operation of the instrument.
(iv) any changes in the instrument which causes it to speak a different
language in effect from that which it originally spoke or which changes
the legal identity or character of this instrument, either in its terms or
the relation of the parties to it, is a material alteration. It makes no
difference whether the alteration is beneficial or prejudicial.
(Rampadarath v. Hari Narain).
The following alterations are material and vitiate the instrument, viz alterations of
(i) Date
(ii) Sum payable
(iii) Time of payment
(iv) Place of payment
(v) Rate of interest
(vi) Addition of place of payment
The following alterations, though material, are permitted by the Negotiable Instruments
Act, 1881 and do not invalidate the instrument:
1. Filling blanks of inchoate instruments. (Section 20)
2. Conversion of a blank indorsement into an indorsement in full (Section 49)
3. Qualified acceptance (Section 86)
4. Crossing of cheques (Section 125)
Effect of material alteration:
The effect of a material alteration of a negotiable instrument is only to discharge those
who become parties thereto prior to the alteration; But if an alteration is made in order
to carry out the common intention of the original parties, it does not render the
instrument void. Any material alteration, if made by an indorsee, discharges his
indorser from all liability to him in respect of the consideration thereof. (Section 87).
The alteration must be so material that it alters the character of the instrument to a
great extent. In Hongkong and Shanghai Bank v. Lee Shi (1928) A.C. 181, it has been
held that an accidental alteration will not render the instrument void. It is necessary to
show that the alteration has been made improperly and intentionally. The effect of

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making the material alteration without the consent of the party bound is exactly the
same as that of cancelling the deed.
Question 16
What is meant by ‘Negotiation’? Distinguish between ‘Negotiability’ v/s ‘Assignability’
of an instrument. (May , 2002, November, 2003)
Answer
Meaning of Negotiation: According to Section 14 of the Negotiable Instrument Act,
1881 when a promissory-note, bill of exchange or cheque is transferred to any person
so as to constitute that person the holder thereof, the instrument is said to be
negotiated.
A negotiable instrument may be transferred in either of two ways, viz.
(i) by negotiation under this Act (Section 14, 46, 47, 48). A negotiable
instrument may be negotiated either by delivery, when it is payable to
bearer or by endorsement and delivery when it is payable to order; or
(ii) by assignment of the instrument: When a person transfer his right to
receive the payment of a debt, ‘assignment of the debt’ lakes place. Thus
where the holder of an instrument transfers it to another so as to confer
a right on the transferee to receive the payment of the instrument,
transfer by assignment takes place. (The Negotiable Instruments Act does
not deal with transfer of negotiable instruments by assignment).
Differences between negotiability and assignability: The following are the
differences between Negotiability and Assignability.
1. In negotiation consideration is presumed. In assignment consideration
must be proved.
2. In case of transfer by negotiation, the transferee acquires all the rights of
a holder in due course; where tile case of transfer by assignment, the
assignee does not acquire the rights of a holder in due course, but has
only the right of his assignor.
3. Notice of transfer to the debtor by the transferee is not necessary. The
acceptor of a bill and the maker of a note are liable on maturity to the
holder in due course of the assignment in case of negotiation. In
assignment it does not bind the debtor unless notice of the assignment
has been given by the assignee to the debtor, and the debtor has,
expressly or implied, assented to it.
In negotiation the instruments payable to bearer are negotiated by mere delivery and
instruments payable to order are negotiated by indorsement and delivery. In an
assignment it can be made only in writing either on the instrument itself or in a
separate document transferring to the assignee the transferor’s rights in the
instrument.
Question 17
When is presentment of an instrument not necessary under the Negotiable Instruments
Act?
(May, 2002)

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Answer
According to Section 76 of the Negotiable Instruments Act 1881, no presentment to
payment is necessary in any one of the following cases:
(i) if the maker, drawee or acceptor intentionally prevents the presentment
of the instrument, or
(ii) if the instrument being payable at his place of business, he closes such
place on a business day during the usual business hours, or
(iii) if the instrument being payable at some other specified place, neither he
nor any other person authorised to pay it attends at such place during
the usual business hours, or
(iv) if the instrument not being payable at any specified place, if he (i.e.
maker etc) cannot after due search be found;
(v) as against any party sought to be charged therewith, if he (i.e maker,
etc.) has engaged to pay notwithstanding non-presentment;
(vi) as against any party if after maturity, with knowledge that the instrument
has not been presented —
he makes a part payment on account of the amount due on the
instrument, or promises to pay the amount due thereon in whole or in
part, or otherwise waives his right to take advantage of any default in
presentment for payment;
as against the drawer, if the drawer could not suffer damage from the of
such presentment.
Question 18
Explain the meaning of ‘Holder’ and ‘Holder in due course’ of a negotiable instrument.
The drawer, ‘D’ is induced by ‘A’ to draw a cheque in favour of P, who is an existing
person. ‘A’ instead of sending the cheque to ‘P’, forgoes his name and pays the
cheque into his own bank. Whether ‘D’ can recover the amount of the cheque from
‘A’s banker. Decide.
(Nov. 2002)
Answer
Meaning of ‘Holder’ and the ‘Holder in due course’ of a negotiable instrument
:
‘Holder’ : Holder of negotiable instrument means as regards all parties prior to himself,
a holder of an instrument for which value has at any time been given.
‘Holder in due course’ : (i) In the case of an instrument payable to bearer means any
person who, for consideration became its possessor before the amount of an
instrument payable. (ii) In the case of an instrument payable to order, ‘holder in due
course’ means any person who became the payee or endorsee of the instrument before
the amount mentioned in it became payable. (iii) He had come to possess the
instrument without having sufficient cause to believe that any defect existed in the title
of transferor from whom he derived his title.
The problem is based upon the privileges of a ‘holder in due course’. Section 42 of the
Negotiable Instrument Act, 1881, states that an acceptor of a bill of exchange drawn in

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a fictitious name and payable to the drawer’s order is not, by reason that such name is
fictitious, relieved from liability to any holder in due cause claiming under an
indorsement by the same hand as the drawer’s signature, and purporting to be made
by the drawer. In this problem, P is not a fictitious payee and D, the drawer can recover
the amount of the cheque from A’s bankers [ North and South Wales Bank B. Macketh
(1908) A.C. 137; Town and Country Advance Co. B, Provincial Bank (1917) 2 Ir. R.421].
Question 19
When a bill of exchange may be dishonoured by ‘non-acceptance’ and ‘non-payment’
under the provisions of Negotiable Instruments Act, 1881? (Nov. 2002)
Answer
A bill of exchange may be dishonoured either by non-acceptance or by non-payment:
Dishonour by non-acceptance :
Section 91 of the Negotiable Instrument Act, 1881 enumerate the following
circumstances when a bill will be considered as dishonoured by non-acceptance.
(i) when the drawee either does not accept the bill within forty eight hours
or presentment or refuse to accept it.
(ii) when one of several drawees, not being partners, makes default in
acceptance.
(iii)when the drawee gives a qualified acceptance.
(iv) when presentment for acceptance is excused and the bill remains
unaccepted;
(v) when the drawee is incompetent to contract.
(vi) presentment in not necessary where the drawee after diligent search
cannot be discovered, or where the drawee is incompetent to contract or
the drawee is a fictitious person.
When a bill has been dishononred by non-acceptance, it gives the holder an immediate
right to have recourse against the drawer or the endorser. Since the dishonour by non-
acceptance constitutes a material ground entitling the holder to take action against the
drawer, he need not wait till the maturity of the bill for it to be dishonoured on
presentment for payment (Ram Ravji Janhekar B. Pruthaddas 20 Bom 133)
Dishonour by non-payment (Section 92 and 76)
A negotiable instrument is said to be dishonoured by non-payment when the maker,
acceptor or drawee, as the case may be, makes default in payment upon being duly
required to pay the same (section 92) Also a negotiable instrument is dishonoured by
non-payment when presentment for payment is excused and the instrument remains
unpaid after maturity (section 76).
Question 20
Referring to the provisions of the Negotiable Instruments Act, 1881, examine the
validity of the following Promissory Notes:
(i) I owe you a sum of Rs.1,000. ‘A’ tells ‘B’.
(ii) ‘X’ promise4s to pay ‘Y’ a sum of Rs.10,000, six months after ‘Y’s
marriage with ‘Z’

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(Nov. 2002).

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Answer
Promissory Note
A Promissory Note is an instrument in writing containing an unconditional undertaking.
signed by the maker, to pay a certain sum of money only to, or to the order of certain
person, or the bearer of the Instrument. (Section 4, The Negotiable Instruments Act,
1881).
Essential elements:
1. It must be in writing.
2. Promise to pay: The instrument must contain an express promise to pay.
3. Definite and unconditional: The promise to pay must be definite and
unconditional. If it is uncertain or conditional, the instrument is invalid.
a. Signed by the maker: The instrument must be signed by the maker, otherwise
it is incomplete and of no effect. Even if it is written by the maker himself and
his name appears in the body of the instrument, his signatures must be there.
An agent of a trading firm can sign a promissory note on behalf of the firm.
b. Certain parties: The instrument must point out with certainty as to who the
maker is and who the payee is. When the maker and the payee cannot he
identified with certainty from the instrument itself, the instrument, even if it
contains an unconditional promise to pay, is not a promissory note.
6. Certain sum of money: The sum payable must be certain and must not be
capable of contingent additions or subtractions.
7. Promise to pay money only: The payment must be in the legal tender
money of India.
Based on the above conditions in accordance with the definition of a promissory note,
the answers to the two problems is as under:
(i) It is not a promissory note in the first case, since there is no promise to
pay.
(ii) In the second case also it is not a promissory note since as it is probably
that Y may not marry.
Question 21
Which are the essential elements of a valid acceptance of a Bill of Exchange? An
acceptor accepts a “Bill of Exchange” but write on it “Accepted but payment will be
made when goods delivered to me is sold.” Decide the validity.(May 2003)
Answer
Essentials of a valid acceptance of a Bill of Exchange:
The essentials of a valid acceptance are as follows:
1. Acceptance must be written: The drawee may use any appropriate word to
convey his assent. It may be sufficient acceptance even if just signatures
are put without additional words. An oral acceptance is not valid in law.
‘
2. Acceptance must be signed: A mere signature would be sufficient for the
purpose. Alternatively, the words ‘accepted’ may be written across the
face of the bill with a signature underneath; if it is not so signed, it would

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not be an acceptance.
3. Acceptance must be on the bill: The acceptance should be on the face of
the bill normally but it is not necessary. An acceptance written on the
back of a bill has been held to be sufficient in law. What is essential is
that must be written on the bill; else it creates no liability as acceptor on
the part of the person who signs it.
4. Acceptance must be completed by delivery: Acceptance would not be
complete and the drawee would not be bound until the drawee has either
actually delivered the accepted bill to the holder or tendered notice of
such acceptance to the holder of the bill or some person on his behalf.
5. Where a bill is drawn in sets, the acceptance should be put on one part
only. Where the drawee signs his acceptance on two or more parts, he
may become liable on each of them separately.
Acceptance may be either general or qualified. An acceptance is said to be general
when the drawee assents without qualification order of the drawer. The qualification
may relate to an event, amount, place, time etc. (Explanation to Section 86 of the
Negotiable Instruments Act 1881). In the given case, the acceptance is a qualified
acceptance since a condition has been attached declaring the payment to be
dependent on the happening of an event therein stated.
As a rule, acceptance must be general acceptance and therefore, the holder is at
liberty to refuse to take a qualified acceptance. Where, he refuse to take it, the bill
shall be dishonoured by non-acceptance. But, if he accepts the qualified acceptance,
even then it binds only him and the acceptor and not the other parties who do not
consent thereto. (Section 86).
Question 22
A issues a cheque for Rs. 25,000/- in favour of B. A has sufficient amount in his account
with the Bank. The cheque was not presented within reasonable time to the Bank for
payment and the Bank, in the meantime, became bankrupt. Decide under the
provisions of the Negotiable Instruments Act, 1881, whether B can recover the money
from A? (May 2003)
Answer
Problem on Negotiable Instruments Act,1881
The problem as asked in the question is based on the provisions of the Negotiable
Instruments Act, 1881 as contained in Section 84. The section provides that where a
cheque is not presented by the holder for payment within a reasonable time of its issue
and the drawer suffers actual damage through the delay because of the failure of the
bank, he is discharged from liability to the extent of such damage. In determining what
is reasonable time, regard shall be had to the nature of the instrument, the usage of
trade and bankers, and the facts of the particular case.
Accordingly, in the given case, the drawer is discharged from the liability to pay the
amount of cheque to B. However, B can sue against the bank for the amount of the
cheque applying the above provisions.
Question 23
What do you mean by an acceptance of a negotiable instrument? Examine validity of
the following in the light of the provisions of the Negotiable Instrument Act, 1881 :
(i) An oral acceptance

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(ii) An acceptance by mere signature without writing the word “accepted”.
(May 2003)
Answer
Meaning of Acceptance
It is only the bill of exchange which requires acceptance. A bill is said to be accepted
when the drawee (i.e. the person on whom the bill is drawn), after putting his signature
on it, either delivers it or gives notice of such acceptance to the holder of the bill or to
some person on his behalf. After the drawee has accepted the bill he is known as the
acceptor (Section 7 para 3 of the Negotiable Instruments Act 1881).
Acceptance may be either general or qualified. The acceptance is qualified when the
drawer does not accept it according to the apparent tenor of the bill but attaches some
condition or qualification which have the effect of either reducing his (acceptor’s)
liability or acceptance of his liability subject to certain conditions. A general
acceptance is the acceptance where the acceptor assents without qualification to the
order of the drawer.
Validity of Acceptance:
Problem (1): It is one of the essential elements of a valid acceptance that the
acceptance must be written on the bill and signed by the drawee. An oral acceptance
is not sufficient in law. Therefore, an oral acceptance of the bill does not stand to be a
valid acceptance.
Problem (2): The usual form in which the drawee accepts the Instrument is by writing
the word ‘accepted’. Across the face of the bill and signing his name underneath. The
mere signature of the drawee without the addition of the words ‘accepted’ is a valid
acceptance. As the law prescribes no particular form for acceptance, there can be no
difficulty in construing acknowledgement as an acceptance but it must satisfy the
requirements of Section 7 of the Negotiable Instruments Act, 1881 i.e. it must appear
on the bill and must be signed by the drawee. (Manakchand v. Chartered Bank).
Question 24
What do you understand by “crossing of cheques”? What is the object of crossing?
State the implications of the following crossing:
(i) Restrictive Crossing.
(ii) Not-negotiable crossing. (November 2003)
Answer
Crossing of Cheques:
Meaning: Crossing of cheque means putting on the cheque two parallel transverse
lines with or without the words (& Co.) written between the lines. Therefore, crossing is
a direction to the drawee banker to pay the amount of money on the crossed cheque
generally to a banker or a particular banker so that the party who obtains the payment
of the cheque can be easily traced.
Object: The object of crossing cheque is to provide safety to the cheque. In order to
prevent the losses which might be incurred if a cheque is an open one, (i.e.- without
crossing) and going to wrong hands, the crossing has been introduced.
Implications of:
(i) Restrictive Crossing: In this type of crossing the words ‘ Account Payee’

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are added to the general or special crossing. Sometime, words like
‘Account Payee & Not Negotiable’ or ‘Bank of India (it could be any Bank)
Account Mr. X’ may be added. The words ‘Account Payee’ on a cheque are
a direction to the collecting banker that the amount collected on the
cheque is to be credited to the account of the payee. Such cheques are
negotiable.
(ii) Not Negotiable: The implication of this kind of crossing is that, the title of
transferee of such a cheque cannot be better than of its transferor. The
use of the words “not negotiable” in a crossed cheque does not render
the cheque non-negotiable but only affects one of the main features of
negotiability. Cheques with not negotiable crossing are negotiable so
long as their title is good. Once the title of the transferor or endorser
becomes defective the title of the transferee is also affected by such
defect and the transferee cannot claim the right of a holder in due
course. In other words, nobody can pass on a title better than what he
himself has. Any one who takes a cheque marked “not negotiable” takes
at his own risk.
Question 25
State the grounds on the basis of which a cheque may be dishonoured by a banker,
inspite of the fact that there is sufficient amount in the account of the drawer.
(November 2003)
Answer
Dishonour of cheque by banker: A banker is justified to dishonour a cheque in the
following circumstances:
1. If a cheque is undated.
2. If it is stale - i.e. not been presented within reasonable period.
3. If the instrument is inchoate or not free from reasonable doubt.
4. When cheque presented before ostensible date.
5. When customer’s funds are not properly applicable.
6. When customers draws cheque upon another branch of the same bank.
7. If the banker receives notice of customer’s insolvency or lunacy.
8. If the customer countermands the payment of cheque.
9. If the court has given order to the Banker not to make payments.
10. If the customer dies and there is notice to the Banker.
11. If notice in respect of closure of the account is served by either party on the
other.
12. If it contains material alteration.
Question 26
Describe, in brief, the main amendments incorporated by the Negotiable Instruments
(Amendment and Miscellaneous Provisions) Act, 2002 in Sections 138, 141 and 142 of
the Principal Act i.e. the Negotiable Instruments Act, 1881. (May 2004)
Answer
Amendments in the Negotiable Instruments Act, 1881

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The main amendments made through the Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002 in Sections 138, 141 and 142 of the Negotiable
Instruments Act, 1881 are as follows:
Section 138
(i) To increase the punishment as prescribed under the Act from one year to two
years.
(ii) To increase the period for issue of notice by the payee to the drawer from 15 days
to 30 days [Proviso(b) to Section 138].
Section 141
To exempt those directors from prosecution under Section 141 of the Act who are
nominated as directors of a company by virtue of their holding any office or
employment in the Central Government or State Government or a Financial Corporation
owned or controlled by the Central Government, or the State Government, as the case
may be [Proviso to Section 141(I)].
Section 142
To provide discretion to the court to waive the period of one month, which has been
prescribed for taking cognizance of the case under the Act [Proviso to Section 142(b)]
Question 27
What is a “Promissory Note” and what are its elements?
S writes “I promise to pay ‘B’ a sum of Rs.500, seven days after my marriage with ‘C’.
Is this a promissory note? (May 2004)
Answer
According to the Section 4 of the Negotiable Instruments Act, 1881, “A promissory note
is an instrument in writing (Not being a Bank-Note or a Currency-Note) containing an
unconditional undertaking, signed by the maker to pay a certain sum of money only to
or to order of a certain person, or to the bearer of the instrument.”
The essential characteristics of a promissory note are as follows:

(1) It must be in writing. In other words an oral promise does not make a promissory
note since it is not an instrument.
(2) The promise to pay must be unconditional. It may be noted that a promise to pay
is not conditional if it depends upon an event, which is certain to happen, but the
time of its occurrence may be uncertain.
(3) The amount promised must be a certain and a definite sum of money.
(4) The instrument must be signed by the maker.
(5) The person to whom the promise is made must be a definite person.
Problem
In the given case S promises to pay Rs.500. It is possible that ‘S’ may never marry ‘C’
and the sum may never become payable. Hence, the promise to pay is conditional as it
depends upon an event, which may not happen. Hence, it is not a promissory note.

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Question 28
Describe the circumstances where under notice of dishonour is excused under the
Negotiable Instruments Act, 1881. (May 2004))
Answer
Notice of Dishonour
As per section 98 of the Negotiable Instruments Act, 1881, following are the cases in
which the Notice of Dishonour is excused:
(i) When notice of dishonour is dispensed with by the party entitled thereto;
(ii) In order to charge the drawer, when he has countermanded payment;
(iii) When the party charged could not suffer damage for want of notice;
(iv) When the party entitled to notice cannot after due search be found; or the party
bound to give notice is, for any other reason, unable without any fault of his own
to give it;
(v) To charge the drawers, when the acceptor is also a drawer;
(vi) When the promissory note is not negotiable;
(vii) When the party entitled to notice of dishonour, knowing the facts unconditionally
promises to pay the amount due on instrument.
Question 29
Define the term ‘Cheque’ as given in the Negotiable Instruments Act, 1881 and
amended by the Negotiable Instruments (Amendment and Miscellaneous Provisions)
Act. 2002.
(November 2004)
Answer
Definition of Cheque:
According to Section 6 of the Negotiable Instruments Act, 1881 as amended by the
Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 “A
cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form”.
A cheque in the electronic form means “a cheque which contains the exact mirror
image of a paper cheque, and is generated, written and signed in a secure system,
ensuring the minimum safety standards with the use of digital signature (with or
without biometrics signatures) and asymmetric crypto system’ [Explanation I (a)].
A truncated cheque means a cheque which is truncated during the course of a clearing
cycle, either by the clearing house or by the bank whether paying or receiving
payment, immediately on generation of an electronic image for transmission,
substituting the further physical movement of the cheque in writing [Explanation I (b)].
Clearing house means the clearing house managed by the Reserve Bank of India or a
cleaning house recognised as such by the Reserve Bank of India [Explanation II].
Question 30

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State the privileges of a ‘Holder in due course” under the Negotiable Instruments Act,
1881.
A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque,
forged C’s indorsement and collected proceeds to the cheque through his Bankers. B
the drawer wants to recover the amount from C’s Bankers. Decide in the light of the
provisions of Negotiable Instruments Act, 1881-
(i) Whether B the drawer, can recover the amount of the cheque from C’s Bankers?
(ii) Whether C is the Fictitious Payee?
(iii) Would your answer be still the same in case C is a fictitious person?
(November 2004)
Answer
Privileges of a “Holder in Due Course”: According to the provisions of the
Negotiable Instruments Act, 1881, a holder in due course has the following privileges:
(i) A person signing and delivering to another a stamped but otherwise inchoate
instrument is debarred from asserting, as against a holder in due course, that the
instrument has not been filled in accordance with the authority given by him, the
stamp being sufficient to cover the amount (Section 20).
(ii) In case of bill of exchange is drawn payable to drawer’s order in a fictitious name
and is endorsed by the same hand as the drawer’s signature. It is not permissible
for acceptor to allege as against the holder in due course that such name is
fictitious (Section 42).
(iii) In case a bill or note is negotiated to a holder in due course, the other parties to
the bill or note cannot avoid liability on the ground that the delivery of the
instrument was conditional or for a special purpose only (Section 42 and 47).
(iv) The person liable in a negotiable instrument cannot set up against the holder in
due course the defences that the instrument had been lost or obtained from the
former by means of an offence or fraud or far an unlawful consideration (Section
58).
(v) No maker of a promissory note, and no drawer of a bill or cheque and no acceptor
of a bill for the honour of the drawer shall, in a suit thereon by a holder in due
course be permitted to deny the validity of the instrument as originally made or
drawn (Section 120).
(vi) No maker of a promissory note and no acceptor of a bill payable to order shall, in
a suit thereon by a holder in due course, be permitted to deny the payee’s
capacity, at the rate of the note or bill, to endorse the same (Section 121).
In brief, it is clear that a holder in due course gets a good title in many respects.
Answer to problem
According to Section 42 of the Negotiable Instruments Act, 1881 an acceptor of a bill of
exchange drawn in a fictitious name and payable to the drawer’s order is not, by
reason that such name is fictitious, relieved from liability to any holder in due course
claiming under an instrument by the same hand as the drawer’s signature, and
purporting to be made by the drawer.
The word “fictitious payee’ means a person who is not in existence or being in
existence, was never intended by the drawer to have the payment. Where drawer
intends the payee to have the payment, then he is not a fictitious payee and the

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forgery of his signature will affect the validity of the cheque.
Applying the above, answers to the questions asked can be as under:
I. In this case B, the drawer can recover the amount of the cheque from C’s bankers
because C’s title was derived through forged endorsement.
II. Here C is not a fictitious payee because the drawer intended him to receive
payment.
III. The result would be different if C is not a real person or is a fictitious person or
was not intended to have the payment.
Question 31
A draws a bill on B. B accepts the bill without any consideration. The bill is transferred
to C without consideration. C transferred it to D for value. Decide-.
(i) Whether D can sue the prior parties of the bill, and
(ii) Whether the prior parties other than D have any right of action intense?
Give your answer in reference to the Provisions of Negotiable Instruments Act. 1881
(November 2004)
Answer
Problem on Negotiable Instrument made without consideration:
Section 43 of the Negotiable Instruments Act, 1881 provides that a negotiable
instrument made, drawn, accepted, indorsed or transferred without consideration, or
for a consideration which fails, creates no obligation of payment between the parties to
the transaction. But if any such party has transferred the instrument with or without
endorsement to a holder for consideration, such holder, and every subsequent holder
deriving title from him, may recover the amount due on such instrument from the
transferor for consideration or any prior party thereto.
(i) In the problem, as asked in the question, A has drawn a bill on B and B accepted
the bill without consideration and transferred it to C without consideration. Later
on in the next transfer by C to D is for value. According to provisions of the
aforesaid section 43, the bill ultimately has been transferred to D with
consideration. Therefore, D can sue any of the parties i.e. A, B or C, as D arrived a
good title on it being taken with consideration.
(ii) As regards to the second part of the problem, the prior parties before D i.e., A, B,
and C have no right of action inter se because first part of Section 43 has clearly
lays down that a negotiable instrument, made, drawn, accepted, indorsed or
transferred without consideration, or for a consideration which fails, creates no
obligation of payment between the parties to the transaction prior to the parties
who receive it on consideration.
Question 32
A cheque payable to bearer is crossed generally and marked “not negotiable”. The
cheque is lost or stolen and comes into possession of B who takes it in good faith and
gives value for it. B deposits the cheque into his own bank and his banker presents it
and obtains payment for his customer from the bank upon which it is drawn. The true
owner of the cheque claims refund of the amount of the cheque from B.
(May 2005)

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Answers
The cheque in the given case was crossed generally and marked ‘Not Negotiable’.
Thereafter, the cheque was lost or stolen and came into the possession of B, who takes
it in good faith and gives value for it. Section 130 of the Negotiable Instruments Act,
1881 provides that a person taking a cheque crossed generally or specially, bearing in
either case the words ‘not negotiable’, shall not have, and shall not be capable of
giving a better title to the cheque than that which the person from whom he took it
had. In view of these provisions, B, even though he was a holder in due course, did not
acquire any title to the cheque as against its true owner. The addition of the words
‘not negotiable’ entirely takes away the main feature of negotiability, which is, that a
holder with a defective title can give a good title to a subsequent holder in due course.
B did not obtain any better title than his immediate transferor, who had either stolen or
found the cheque and was not the true owner of the cheque. Therefore, as regards the
true owner, B was in no better position than the transferor. B is also liable to repay the
amount of the cheque to the true owner. He can, however, proceed against the person
from whom he took the cheque.
In the given case, both the collecting banker and the paying bankers would be
exonerated. Since the collecting banker, in good faith and without negligence, had
received payment for B, who was its customer of the cheque which was crossed
generally, the banker would not be liable, in case the title proved to be defective, to
the true owner by reason only of having received the payment of the cheque for his
customer (Section 131). Since the paying banker on whom the crossed cheque was
drawn, had paid the same in due course, the banker would also not be liable to the true
owner. (Section 128).
Question 33
‘A’ draws a cheque for Rs.50,000. When the cheque ought to be presented to the
drawee bank, the drawer has sufficient funds to make payment of the cheque. The
bank fails before the cheque is presented. The payee demands payment from the
drawer. What is the liability of the drawer.
(May 2005)
Answer
Section 84 of the Negotiable Instruments Act, 1881 provides that where a cheque is not
presented for payment within a reasonable time of its issue and the drawer or person
on whose account it is drawn had the right at the time when presentation ought to
have been made, as between himself and the banker, to have the cheque paid and
suffers actual damage through the delay, he is discharged from the liability, that is to
say, to the extent to which such drawer or person is a creditor of the banker to a larger
amount than would have been if such cheque had been paid. In determining what is a
reasonable time, regard shall be had to the nature of the instrument, the usage of
trade and of banker, and the facts of the particular case.
Applying the above provisions to the given problem since the payee has not presented
the cheque to the drawer’s bank within a reasonable time when the drawer had funds
to pay the cheque, and the drawer has suffered actual damage, the drawer is
discharged from the liability.
Question 34
State the cases in which a banker is justified or bound to dishonour cheques. (May

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2005)
Answer
In the following cases in which a banker is bound or justified to dishonour cheques:
(i) A banker is justified to dishonour a cheque in reference to payment of a post-dated
cheque presented for payment before its ostensible date;
(ii) The banker is bound to pay a cheque only when it has ‘sufficient funds of the
drawer in his hands’ otherwise not.
(iii) The banker is bound to honour his customer’s cheque only when the funds of the
customers in his hands are ‘properly applicable to the payment of such cheques’
otherwise not.
(iv) A banker is justified in refusing to honour a cheque which is irregular, or
ambiguous, or drawn in a form of doubtful legality;
(v) A banker is justified in refusing payment of a cheque drawn by a customer having
credit with one branch of the bank, where the cheque is drawn upon another
branch in which he has no account or in which his account is overdrawn.
(vi) When the customer becomes insolvent, or an order of adjudication has been made
against him, all his assets vest in the official assignee, and the banker should
thereafter refuse to pay his customer’s cheques.
(vii) The duty and authority of a banker to pay a cheque drawn on him by his
customer is determined by the customer countermanding payment;
(viii) Notice of death of the customer determines the authority of the banker to
dishonour a cheque, but if the banker pays a cheque before he receives notice of
his customer’s death, payment is valid.
(ix) If garnishee or other legal order from a court attaching or otherwise dealing with
money in the hands of the banker, is served on the banker.
(x) If it contains material alterations, irregular signature or irregular endorsement.
(xi) If it is stale, that is if it has not been presented within reasonable period.
Question 35
A, a major, and B, a minor, executed a Promissory Note in favour of C. Examine with
reference to the provisions of the negotiable Instruments Act, 1881 the validity of the
Promissory Note and state whether it is binding on A and B. (November
2005)
Answer
Minor being a party to Negotiable Instrument: Every person competent to enter
into contract has capacity to incur liability by making, drawing, accepting, endorsing,
delivering and negotiating a Promissory Note, Bill of Exchange or clearance (Section
26, Para 1, Negotiable Instrument Act, 1881).
As a Minor’s agreement is void, he cannot bind himself by becoming a party to a
Negotiable Instrument. But he may draw, endorse, deliver and negotiate such
instruments so as to bind all parties except himself (Section 26, para 2).
In view of the provisions of Section 26 explained above, the promissory note executed
by A and B is valid even though a minor is a party to it. B, being a minor is not liable;
but his immunity from liability does not absolve the other joint promissory, viz., A from

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liability [Sulochona v. Pondiyan Bank Ltd.,].
Question 36
In what way does the Negotiable Instruments Act, 1881 regulate the determination of
the ‘Date of maturity’ of a Bill of Exchange. Ascertain the ‘Date of maturity’ of a bill
payable 120 days after the date. The Bill of exchange was drawn on 1st June, 2005.
(November 2005)
Answer
Calculation of maturity of a Bill of Exchange: The maturity of a bill, not payable
on demand, at sight or on presentment, is at maturity on the third day after the day on
which it is expressed to be payable (Section 22, para 2 of Negotiable Instruments Act,
1881). Three days are allowed as days of grace. No days of grace are allowed in the
case of a bill payable on demand, at sight, or presentment.
When a bill is made payable as stated number of months after date, the period stated
terminates on the day of the month, which corresponds with the day on which the
instrument is dated. When it is made payable after a stated number of months after
sight the period terminates on the day of the month which corresponds with the day on
which it is presented for acceptance or sight or noted for non-acceptance on protested
for Non-acceptance when it is payable a stated number of months after a certain event,
the period terminates on the day of the month which corresponds with the day on
which the event happens. (Section 23).
When a bill is made payable a stated number of months after sight and has been
accepted for honour, the period terminates which the day of the month which
corresponds with the day on which it was so accepted.
If the month in which the period would terminate has no corresponding day, the period
terminates on the last day of such month (Section 23).
In calculating the date a bill made payable a certain number of days after date or after
sight or after a certain event is at maturity, the day of the date, or the day of protest
for non-accordance, or the day on which the event happens shall be excluded (Section
24).
Three days of grace are allowed to these instruments after the day on which they are
expressed to be payable. (Section 22).
When the last day of grace falls on a day, which is public holiday, the instrument is due
and payable on the preceding business day (Section 25).
Answer to Problem: In this case the day of presentment for sight is to be excluded
i.e. 1st June, 2005. The period of 120 days ends on 21st September, 2005 (June 29 days
+ July 31 days + August 31 Days + September 29 days = 120 days). Three days of
grace are to be added. It falls due on 2 nd October, 2005, which happens to be a public
holiday. As such it will fall due on 1st October, 2005 i.e., the preceding Business Day.
Question 37
Examine when shall a holder of a negotiable instrument be considered as a holder in
due course under the provisions of the Negotiable Instruments Act, 1881.
(November 2005)

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Answer
According to Section 9 of the Negotiable Instruments Act, 1881, a holder of a
negotiable instrument will be considered as holder in due course if he fulfills the
following conditions.
(i) that for consideration he became the possessor of the negotiable instrument of
payable to bearer or the payee or endorsee thereof if payable to order.
(ii) that he became the holder of the instrument before maturity.
that he became the holder of the instrument in good faith i.e., without sufficient
cause to believe that any infinity or defect existed in the title of the person from
whom he derived the title.
Question 38
Point out the differences between “transfer by negotiation” and “transfer by
assignment” under the provisions of the Negotiable Instruments Act, 1881.
(May 2006)
Answer
Negotiation and Assignment: The essential distinction between transfer by
negotiation and transfer by agreement are as under as provisions of the
Negotiable Instrument Act, 1881.
(i) In the latter case the assignee does not acquire the right of a holder in due course
but has only the right, title and interest of his assignor; on the other hand in the
former case he acquires all the rights of a holder in due course i.e., right from
equities (Mohammad Khuerail vs. Ranga Rao, 24 M. 654).
(ii) In the case of negotiable instrument, notice of transfer is not necessary while in the
case of assignment of chose in action, notice or assignment must be served by the
assignee on his debtor.
(iii) Again, in the case of transfer of negotiable instrument, consideration is presumed,
but in the case of transfer by assignment, consideration must be proved as in the
case of any other contract.
(iv) Negotiation requires either delivery only in the case of “bearer” instrument, or
endorsement and delivery only in the case of “ order instrument”. But in the case
of an assignment, Section 130 of the Transfer of Property Act requires a document
to be reduced into writing and signed by the transferor.
(v) Endorsement does not require payment of stamp duty whereas negotiation requires
payment of stamps duty
Question 39
When is an alteration in a negotiable instrument is deemed to be a “material
alternation” under the Negotiable Instruments Act, 1881? What are the consequences
of material alternation in a negotiable instrument?
(May 2006)
Answer

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Material alternation and its effect: As per the negotiable Instrument Act,
1881, an alteration is material which
(a) alters the character or identity of the instrument or which shakes the very
foundation of the instrument.
(b) changes the rights and, liabilities of the parties or any of the parties to the
instrument or
(c) alters the operation of the instrument.
Any change in an instrument which causes it to speak a difference language in
effect from that which it originally spoke, or which changes the legal identity or
character of the instrument either in its terms or the relation of the parties to it
is a material alteration. It makes no difference whether the alteration is
beneficial or prejudicial.
Instances of material alteration. The following alterations are material i.e. the
alteration of the date, the sum payable, the time of payment, the place of
payment, additional of place of payment, and the rate of interest.
These alterations vitiate the instrument.
Effect of material alteration – As per Section 87 of the Negotiable
Instrument Act, 1881, a material alteration of a negotiable instrument renders
the same void against persons who were parties thereto before such alteration
unless they have consented to the alteration.
But if an alteration is made in order to carry out the common intention of the original
parties, it does not render the instrument void. Any material alteration if made by an
indorsee, discharges his indorser from all liability to him in ‘respect of the consideration
thereof.
Question 40
J. a shareholder of a Company purchased for his personal use certain goods from a
Mall (Departmental Store) on credit. He sent a cheque drawn on the Company’s
account to the Mall (Departmental Store) towards the full payment of the bills. The
cheque was dishonoured by the Company’s Bank. J, the shareholder of the company
was neither a Director nor a person in-charge of the company. Examining the
provisions of the Negotiable Instruments Act, 1881 state whether J has committed an
offence under Section 138 of the Act and decide whether he (J) can be held liable for
the payment, for the goods purchase from the Mall (Departmental Store).
(November 2006)
Answer
The facts of the problem are identical with the facts of a case know as H.N.D. Mulla
Feroze Vs. C.Y. Somaya Julu, J(2004) 55 SCL (AP) wherein the Andhra Pradesh High
Court held that although the petitioner has an legal liability to refund the amount to the
appellant, petitioner is not the drawer of the cheque, which was dishonoured and the
cheque was also not drawn on an account maintained by him but was drawn on an
account maintained by the company. Hence, it was held that the petitioner J could not
be said to have committed the offence under Section 138 of the Negotiable Instrument
Act, 1881. Therefore X also is not liable for the cheque but legally liable for the

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payments for the goods.
Question 41
B obtains A’s acceptance to a bill of exchange by fraud. Be endorses it to C who is a
holder in due course. C endorses the bill to D who knows of the fraud. Referring to the
provisions of the Negotiable Instruments Act, 1882, decide whether D can recover the
money from A in the given case.
(November 2006)
Answer
Section 53 of the Negotiable Instrument Act, 1881 provides that a holder of negotiable
instrument who derives title from a holder in due course has the right thereon of that
holder in due course. Such holder of the bill who is not himself a party to any fraud or
illegality affecting it, has all the rights of that holder in due course as regards to the
acceptor and all parties to the bill prior to that holder. In this case, it is clear that
though D was aware of the fraud, he was himself not a party to it. He obtained the
instrument from C who was a holder in due course. So D gets a good title and can
recover from A.
Question 42
A owes a certain sum of money to B. A does not know the exact amount and hence he
makes out a blank cheque in favour of B, signs and delivers it to B with a request to fill up
the amount due, payable by him. B fills up fraudulently the amount larger than the
amount due, payable by A and endorses the cheque to C in full payment of dues of B.
Cheque of A is dishonoured. Referring to the provisions of the Negotiable Instruments Act,
1881, discuss the rights of B and C. (May 2007)
Answer
Section 44 of the Negotiable Instruments Act 1881 is applicable in this case. According
to Section 44 of this Act, B who is a party in immediate relation with the drawer of the
cheque is entitled to recover from A only the exact amount due from A and not the
amount entered in the cheque. However the right of C, who is a holder for value, is not
adversely affected and he can claim the full amount of the cheque from B.
Question 43
Referring to the provisions of the Negotiable Instruments Act, 1881, examine the
validity of the following:
(i) A bill of Exchange originally drawn by M for a sum of Rs. 10,000, but accepted by R
only for Rs.7,000.
(ii) A cheque marked ‘Not Negotiable’ is not transferable. (May 2007)
Answer
(i) As per the provisions of the Negotiable Instruments Act 1881, acceptance may be
either general or qualified. It is qualified when the drawee does not accept the bill
according to the apparent tenor of the bill but attaches some condition or
qualification which have the effect of either reducing his (acceptor’s) liability or
acceptance of this liability is subject to certain condition. The holder of the bill is
entitled to require an absolute and unconditional acceptance, otherwise he will
treat it as dishonoured however, he may agree to qualified acceptance but he does

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so at his own peril, since he discharges all parties prior to himself, unless he has
obtained their consent.
Thus in this given case in accordance with the Explanation to Section 86 of the Act,
when the drawee undertakes the payment of part only of the sum ordered to be
paid, it is a qualified acceptance and the drawer may treat it as dishonoured unless
agreed by him. If the Drawer (M) agrees to acceptance, the drawee (R) is
responsible for a sum of Rs. 7000 only.
(ii) It is wrong statement. A cheque marked “not negotiable” is a transferable
instrument. The inclusion of the words ‘not negotiable’ however makes a
significant difference in the transferability of the cheques. The holder of such a
cheque cannot acquire title better than that of the transferor.
Question 44
What are the essential elements of a "Promissory note" under the Negotiable
Instruments Act, 1881? Whether the following notes may be considered as valid
Promissory notes:
(i) "I promise to pay Rs. 5,000 or 7,000 to Mr. Ram."
(ii) I promise to pay to Mohan Rs. 500, if he secures 60% marks in the examination.
(iii) I promise to pay Rs. 3,000 to Ravi after 15 days of the death of A. (November
2007)
Answer
A promissory note is an instrument (not being a bank note or currency note) in writing
containing an unconditional undertaking, signed by the maker to pay a certain sum of
money only to or the holder of, a certain person or to the bearer of the instrument,
(Section 4 of the Negotiable Instruments Act, 1881).
In view of the above provision of the said Act, following are the essential elements of a
promissory note-
1. It must be in writing.
2. The promise to pay must be unconditional.
3. The amount promised must be a certain and a definite sum of money.
4. The instrument must be signed by the maker.
5. The person to whom the promise is made must be a definite person.
Thus:
(i) In case (i), it is not a valid promissory note because the amount is not certain.
(ii) In case (ii), it is not a valid promissory note because it is conditional. .
(iii) In case (iii), it is a valid promissory note because death of A is a certainty even if
time of death is not certain.
Question 45
What do you understand by "Material alteration” under the Negotiable Instruments Act,
1881? State whether the following alterations are material alterations under the
Negotiable Instruments Act, 1881?
(i) The holder of the bill inserts the word "or order” in the bill,
(ii) The holder of the bearer cheque converts it into account payee cheque,

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(iii) A bill payable to ' is converted into a bill payable to X and Y. (November
2007)
Answer
As per the Negotiable Instrument Act, 1881, an alteration can be called a material
alteration if it alters or attempts to alters the character of the instrument and affects or
is likely to affect the contract which the instrument contains or is evidence of. Thus, it
totally alters the business effect of the instrument. It makes the instrument speak a
language other than that was intended.
The following materials alterations have been authorised by the Act and do not require
any authentication:
(a) filling blanks of inchoate instruments [Section 20]
(b) Conversion of a blank endorsement into an endorsement in full [Section 49]
(c) Crossing of cheque [Section 125]
The important material and non-material alternation are:
Material alteration Non-material alteration
1. Alteration of date of 1. Conversion of instrument
instrument (e.g. if a bill payable to bearer.
dated 1st may, 1998) is
changed to a bill dated 1st
June, 1998.
2. Alteration of time of 2. Conversion of instrument
payment (e.g. if a bill payable to bearer into
payable three months after order.
date is changed to bill
payable four months
payable after date).
3. Alteration of place of 3. Elimination of the words
payment (e.g., if a bill ‘or order' from an
payable at Delhi is changed endorsement.
to bill payable at Mumbai).
4. Alteration of amount 4. Addition of the words ‘or
payable (e.g., if bill for Rs. demand’ to a note in
1,000 is changed to a bill which no time or payment
for Rs. 2000 is expressed.
5. Conversion of blank
endorsement into special
endorsement.
6. Addition of a new party to
an instrument.
7. Alteration of one of the
clauses of the instrument
containing a penal action
As per the above sections the changes of serial numbers (i) is non-material and
changes of serial numbers (ii) (iii) are material changes in the given problem.

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Question 46
Bharat executed a promissory note in favour of Bhushan for Rs. 5 crores. The said
amount was payable three days after sight. Bhushan, on maturity, presented the
promissory note on 1st January, 2008 to Bharat. Bharat made the payments on 4th
January, 2008. Bhushan wants to recover interest for one day from Bharat. Advise
Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is
liable to pay the interest for one day? (May 2008)
Answer
Claim of Interest
Section 24 of the Negotiable Instruments Act, 1881 states that where a bill or note is
payable after date or after sight or after happening of a specified event, the time of
payment is determined by excluding the day from which the time begins to run.
Therefore, in the given case, Bharat will succeed in objecting to Bhushan’s claim.
Bharat paid rightly “three days after sight”. Since the bill was presented on 1 st January,
Bharat was required to pay only on the 4th and not on 3rd April, as contended by Bharat.
Question 47
X draws a cheque in favour of Y. After having issued the cheque he informs Y not to
present the cheque for payment. He also informs the bank to stop payment. Decide,
under provisions of the Negotiable Instruments Act, 1881, whether the said acts of X
constitute an offence against him ? (May 2008)
Answer
Problem: Offence under the Negotiable Instruments Act, 1881
This problem is based on the case of Modi Cements Ltd. Vs. Kuchil Kumar Nandi, 1998.
In this case the Supreme Court held that once a cheque is issued by the drawer, a
presumption under Section 139 of the Negotiable Instruments Act, 1881 follows and
merely because the drawer issues a notice thereafter to the drawee or to the bank for
stoppage of payment, it will not preclude an action under Section 138. The object of
Sections 138 to 142 of the Act is to promote the efficacy of the banking operations and
to ensure credibility in transacting business through cheques. Section 138 is a penal
provision in the sense that once a cheque is drawn on an account maintained by the
drawer with his banker for payment of any amount of money to another person from
out of that account for the discharge in whole or in part of any debt or other liability, is
informed by the bank unpaid either because of insufficiency of amount to honour the
cheques or the amount exceeding the arrangement made with the bank, such a person
shall be deemed to have committed an offence.
Question 48
Discuss with reasons, whether the following persons can be called as a ‘holder’ under
the Negotiable Instruments Act, 1881:
(i) X who obtains a cheque drawn by Y by way of gift.
(ii) A, the payee of the cheque, who is prohibited by a court order from receiving the
amount of the cheque.
(iii) M, who finds a cheque payable to bearer, on the road and retains it.
(iv) B, the agent of C, is entrusted with an instrument without endorsement by C,
who is the payee.

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(v) B, who steals a blank cheque of A and forges A’s signature. (November 2008)
Answer
Person to be called as a holder
As per section 8 of the Negotiable Instruments Act,1881 ‘holder’ of a Negotiable
Instrument means any person entitled in his own name to the possession of it and to
receive or recover the amount due thereon from the parties thereto.
On applying the above provision in the given cases-
(i) Yes, X can be termed as a holder because he has a right to possession and to
receive the amount due in his own name.
(ii) No, he is not a ‘holder’ because to be called as a ‘holder’ he must be entitled not
only to the possession of the instrument but also to receive the amount mentioned
therein.
(iii) No, M is not a holder of the Instrument though he is in possession of the cheque,
so is not entitled to the possession of it in his own name.
(iv) No, B is not a holder. While the agent may receive payment of the amount
mentioned in the cheque, yet he cannot be called the holder thereof because he has
no right to sue on the instrument in his own name.
(v) No, B is not a holder because he is in wrongful possession of the instrument.
Question 49
X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the
order of Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its
holder in due course. Can Y avoid payment of the bill? Decide in the light of the
provisions of the Negotiable Instruments Act, 1881.(November 2008)
Answer
Bill drawn in fictitious name
The problem is based on the provision of Section 42 of the Negotiable Instruments Act,
1881. In case a bill of exchange is drawn payable to the drawer’s order in a fictitious
name and is endorsed by the same hand as the drawer’s signature, it is not permissible
for the acceptor to allege as against the holder in due course that such name is
fictitious. Accordingly, in the instant case, Y cannot avoid payment by raising the plea
that the drawer (Z) is fictitious. The only condition is that the signature of Z as drawer
and as endorser must be in the same handwriting.

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5
THE PAYMENT OF BONUS ACT, 1965
Question 1
Explain with reference to the provisions of the Payment of Bonus Act the possibility of a
non-banking company relying on its Balance Sheet and Profit and Loss Account in the
case of a dispute with its employees relating to bonus payable under the Act and the
limitations, if any, in this regard. (May, 2000)
Answer
Presumptions about the accuracy of balance sheet and profit and loss account
of a company: Dispute between an employer and his employees regarding bonus
payable under the Payment of Bonus Act, 1965 shall be deemed to be an industrial
dispute within the meaning of the Industrial Disputes Act, 1947 or any corresponding
law relating to investigation and settlement of industrial disputes in force in a state and
the provisions of that Act or as the case may be such law shall, save and otherwise
expressly provided, apply accordingly (Section 22).
Proceeding may be lying before any arbitrator or tribunal under the Industrial Disputes
Act or under any corresponding law relating to investigation and settlement of
industrial disputes in force in the state (herein referred to as the ‘said authority’) to
which any dispute of the nature specified in Section 22 has been referred. During the
course of such proceeding the balance sheet and the profit and loss account of an
employer, being a corporation or a company other than a banking company may be
produced. If these statements of accounts are audited by the Comptroller and Auditor
General of India or by auditors qualified under Section 226(1) of the Companies Act,
then as specifically provided in Section 23 of the Payment of Bonus Act, the said
authority may presume that those are accurate. In view of this presumption corporation
or company need not prove the accuracy of such statements by affidavit or any other
mode.
But there are certain limitations. If the said authority is satisfied that those statements
are not accurate, it may take such steps as it thinks necessary to find out the accuracy
thereof.
Further, the trade union and if there is no trade union, employees being a party to the
dispute may apply to the specified authority seeking clarification relating to any item in
the balance sheet or profit and loss account. On receipt of such application the
specified authority is to satisfy itself as to the necessity of such clarification. On being
thus satisfied, the specified authority may direct the corporation or the company to
furnish to the trade union or the employees such clarifications within such time as may
be specified in the direction. Thereupon, the company or the corporation must comply
with such direction [Section 23(2)].
Question 2

CA-IPCC
State the deductions which are allowed under the third schedule of the payment of
Bonus Act, 1965 for the purpose of computation of ‘Available surplus’ in the case of a
Banking Company, which is not a Foreign Company.(November 2000)
Answer
Deductions that are allowed under the Third Schedule of the Payment of Bonus Act,
1965 are:
(i) the dividends payable on its preference shares capital for the accounting year
calculated at the rate at winch such dividends are payable;
(ii) 7.5 per cent of its paid up equity capital as at the commencement of the
accounting year;
(iii) 5 per cent of its reserves shown in its balance sheet at the commencement of the
accounting year, including any profits carried forward from the previous account
year;
(iv) any sum which in respect of the accounting year, is transferred by it.
(a) to a reserve fund under sub-section (1) of Section 17 of the Banking Regulation
(b) to any reserve in India in pursuance or any direction or advice given by the
Reserve Bank of India, whichever is higher;
Question 3
In what way does the Payment of Bonus Act, 1965 regulate the payment of bonus to
employees linked with productivity? What restrictions apply in such cases on payment
of bonus to an employee? (May 2001)
Answer
The Payment of Bonus Act, S965 by virtue of provisions as contained in Section 31A
regulate and restrict the payment of bonus to an employee linked with productivity.
Accordingly, there may be agreement or settlement by the employees with their
employer for payment of an annual bonus linked with production or productivity in lieu
of bonus based on profits, as is payable under the Act. Section 31A allows such an
agreement/settlement. Therefore when such an agreement has been entered into, the
employees are entitled to receive bonus as per terms of the agreement/settlement,
subject to the following restrictions by the section:
1. any such agreement/settlement whereby the employees relinquish their right to
receive minimum bonus under Section 10 shall, be null and void in so far as it
purports to deprive the employees of the right of receiving minimum bonus.
2. if the bonus payable under such agreement exceeds 20% of the salary/wages
earned by the employees during the relevant accounting year, such employees are
not entitled to the excess over 20% of salary/wages.
3. Further provisions of Section 31 A shall have effect notwithstanding inconsistent
therewith contained in any other law for the time being in force or in the terms of
any award, agreement or contract of service. (Section 34)
4. Furthermore, provisions of the Coal Mines Provident Fund, Family Pension and
Bonus Scheme Act, 1948 or of any scheme made thereunder shall not be affected
by the provisions of Section 31A of the Payment of Bonus Act, 1965. (Section 35).
Question 4

CA-IPCC
Explain the provisions of the Payment of Bonus Act, 1965 relating to the following:
(i) Adjustment of customary bonus against bonus payable under the Act.
(ii) Application of the Act to the establishments in public sector. What is the lime limit
within which payment of bonus due to an employee under the Act, be paid ?
(May 2001)
Answer
(i) Adjustment of coustomary bonus againts bonus payble: The Payment of
Bonus Act, 1965 provides that if in any accounting year, an employer has paid any
customary bonus to an employee, then the former shall be entitled to deduct the
amount of bonus so paid from the amount of bonus payable by him to employee
under the Act in respect of that accounting year. The employee shall be entitled to
receive only the balance. The employer can do the same thing even in a case
where he has paid off the bonus payable under the Act to an employee before the
date on which such bonus payable becomes payable. (Section 17)
(ii) Application of the Act to the establishment in public sector: Section 20 of
the Payment of Bonus Act, 1965 provides that if in any accounting year, an
establishment in public sector may sell any goods produced or manufactured by it
or it may render any services in competition with an establishment in private
sector. And if the income from such sale or service or both is not less than 20% of
the gross income of establishment in public sector, then the provisions of Bonus Act
shall apply in relation to establishment in private Sector (Sub-section 1) Save as
otherwise provided in Subsection (1), nothing in this Act shal apply to the
employees employed by any establishment in the public sector (Sub-section2).
The limit for a payment of bonus: The employer is bound to pay his employee
bonus within one month from the date on which the award becomes enforceable or the
settlement comes into operation, if a dispute regarding payment of bonus is pending
before any authority under Section 22 of the Act. In other cases, however, the payment
of the bonus is to be made within a period of 8 months from closing of the accounting.
But this period of 8 months may be extended upto a maximum of 2 years by the
appropriate Government or by any authority specified; by the appropriate Government.
This extension is to be granted on the application of the employer and only for
sufficient reasons.
Question 5
In what way does the Payment of Bonus, 1965 Act regulate the payment of ‘Minimum
and ‘Maximum’ Bonus payable to an employee under the Act? (Nov. 2001, May 2004)
Answer
Minimum and maximum bonus payable to an employee under the
Payment of Bonus Act, 1965.
Payment of bonus to an employee—minimum and maximum is regulated by the
provisions of the Payment of Bonus Act, 1963 as contained in Sections 10 and 11 of the
Act.
Minimum Bonus

CA-IPCC
According to Section 10 subject to the other provisions of the Act, every employer shall
be bound to pay to every employee in respect of every accounting year, minimum
bonus which shall be 8.33% of the salary or wage earned by the employee during the
accounting year or Rs.100, whichever is higher, whether or not the employer has any
allocable surplus in the accounting year. But if the employee has not completed 15
years of age at the beginning of the accounting year he will be entitled to a minimum
bonus which snail be 8.33% of the salary or wage during the accounting year Rs.60,
whichever is higher. Even it the employer suffers losses during the accounting year he
is bound to pay minimum bonus as prescribed by Section 10- (State v. Sardar Dalip
Singh Majilhia).
Maximum Bonus
According to Section 11 where, in respect of any accounting year referred to in Section
10, the allocable surplus exceeds the amount of minimum bonus payable to the
employees under that section, The employer shall, in lieu of such minimum bonus, he
bound to pay to every employee in respect ol that accounting year bonus which shall
be an amount in proportion to the salary of wage earned by the employee during the
accounting year subject to a.maximum 20% of such salary or wage.
Question 6
Explain the meaning of “Salary or Wage” under the Payment of Bonus Act, 1965.
(May 2002, May 2003)
Answer
Meaning of Salary or Wages: According to Section 2(21) of the Payment of Bonus Act,
1965, the term ‘salary or wage’ means alt remuneration other than remuneration in
respect of overtime work, capable of being expressed in terms of money, which would,
if the terms of employment, express or implied, were fulfilled, be payable to an
employee in respect of his employment or of work done in such employment and
includes dearness allowance; i.e. all cash payments by whatever name called, paid to
an employee on account of a rise in the cost of living. But the term excludes:
(i) any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or of supply of light, water, medical
attendance or other amenities or of any service or of any concessional supply of
foodgrains or other articles;
(iii) any travelling concession;
(iv) any bonus including incentive, production and attendance bonus;
(v) any contribution paid or payable by the employer to any pension fund or provident
fund or for the benefit of the employee under any law for the time being in force;
(vi) any retrenchment compensation or any gratuity or other retirement benefit payable
to the-employee or any exgratia payment made to him;
(vii) any commission payable to the employee.
Where an employee is given in lieu of the whole or part of the salary or wage payable
to him, free food allowance or free food by his employer, such food allowance or the
value of such food shall be deemed to form part of the salary or wage of such
employee.

CA-IPCC
Question 7
Specify any six kinds of establishments which are not covered under the Payment of
Bonus Act, 1965. (May, 2002)
Answer
Kinds of establishment not covered under the payment of Bonus Act, 1965:
The payment of Bonus Act, 1965 does not cover under its purview the following
categories of employees (Section 32):
(i) Employees employed by the Life Insurance Corporation of India.
(ii) Seamen as defined under Section 3(42) of the Merchant Shipping Act, 1958.
(iii) Employees registered or listed under any scheme made under the Dock Workers
(Regulation of Employment) Act, 1948 and employed by the registered or listed
employers.
(iv) Employees employed by an establishment engaged in any industry carried on by or
under tile authority of any department of the Central Government or a State
Government or a local authority.
(v) Employees employed by :
(a) the Indian Red Cross Society or any other institution of a like nature (including
its branches),
(b) Universities and other educational institutions;
Institutions including hospitals, chambers of commerce and social welfare
institutions established not for purposes of profit.
(vi) Employees employed through contractors on building-operations.
(i) Employees employed by Reserve Bank of India.
(ii) Employees employed by :
(a) The Industrial Finance Corporation of India;
(b) Any financial corporation established under section 3 or any joint financial
corporation established under section 3A of the State Financial Corporation Act 1951;
(c) The Deposit insurance Corporation;
(d) The Agricultural Refinance Corporation;
(e) The Unit Trust of India;
(f) The Industrial Development Bank of India;
(g) Any other Financial Institution (other than a banking company) being an
establishment in Public Sector, which the Central Government ‘nay be notification in
the Official Gazette, specify; while so specifying the Central Government shall have
regard to its capital structure, its objectives and the nature and extent of financial
assistance or any concessions given to it by the Government and any other relevant
factor.
(h) Employees employed by inland water transport establishment operating on
routes passing through any other country.
Besides the above, if the appropriate government is of the opinion that it will be in the
public interest, having regard to the financial position and other relevant circumstances
of any establishment or class of establishment, it may, by notification in the Official

CA-IPCC
Gazette, exempt for such periods as may be specified therein and subject to such
conditions as it may think fit to impose, such establishments from all any of the
provisions of this Act.
Question 8
Who is entitled to bonus under the Payment of Bonus Act, 1965? Does this Act
prescribe any disqualifications also for claiming bonus? Explain.(May, 2002 & 2004)
Answer
Every employee of an establishment covered under the Payment of Bonus Act, 1965 is
entitled to bonus from his employer in an accounting year, provided he has worked in
that establishment for not less than 30 working days in the year on a salary less than
Rs.3,500 per month (Section 2 (13) read with Section. 8). (This ceiling of Rs. 3,500
has been now revised to Rs. 10,000, with effect from Nov 2007)
If an employee is prevented from working and subsequently re-instated in service,
employee’s statutory liability for bonus cannot be said to have been lost. “Nor can the
employer refuse such bonus. [(ONGC vs Sham Kumar Sahegal (1995)].
An employee in the following cases is entitled to bonus:

(1) A temporary workman on the basis of total number of days worked by him.
(2) An employee of a seasonal factory is entitled to proportionate bonus and not
minimum bonus, as prescribed by the Act.
(3) A part-time employee, as a sweeper engaged on a regular basis. (Automobile
Karmachari Sangh vs. Industrial Tribunal (1970) 38 FJR/268.
(4) A retrenched employee, provided he has worked for minimum qualifying period
(East Asiatic C. (P) Ltd. Vs. Industrial Tribunal (1961) LIJ 720).
(5) A probationer is an employee and as such is entitled to bonus. (Bank of Mudra Ltd.
Vs. Employee’s Union, 1970 (2) US (21)).
(6) A dismissed employee re-instated with back wages is entitled to bonus (Gammon
India Ltd Vs. Nirnjan Das (1984) 2 LIJ 223)
(7) A piece rated worker is entitled to bonus (Mathuradas Kani Vs. L.A. Tribunal AIR
(1958) SC. 899).
Disqualifications:
There are, however, certain disqualifications of an employee to claim bonus in an
account year. An employee who has been dismissed from service for a) fraud; or b)
riotous or violent behaviour while on the premises of the establishment; or c) theft,
misappropriation or sabotage of any property of the establishment is not entitled, for
bonus (Section 9). Further an employee in the following cases is not entitled to bonus:
1. An apprentice .is not entitled to bonus (Wheel & RIM Co. Vs. Govt. of T.N.)
2. Ah employee employed” through contractors on building operation, is not entitled
to - bonus (Section 32).
3. An employee who is dismissed from service on the ground of misconduct as
mention in Section 9 (Pandian Roadways Corporation Ltd. Vs. Presiding officer).

CA-IPCC
Regarding a probationer, in case of Bank of Madwa Ltd. Vs. Employee’s Union, it has
been held that a probationer is an employee and as such he is entitled to bonus.
Question 9
Explain the meaning of ‘Allocable Surplus’ and ‘Available Surplus’ stated in the
Payment of Bonus Act, 1965 (Nov. 2002).

CA-IPCC
Answer
Allocable Surplus :
According to Section 2(4) of the Payment of Bonus Act, 1965 the expression allocable
surplus means 67% of the available surplus in an accounting year, in relation to an
employer, being a company, other than a banking company, which has not made the
arrangements prescribed under the Income Tax Act, for the declaration and payment
within India of the dividends payable out of its profits in accordance with the provisions
of Section 194 of that Act. In any other case, the allocable surplus means 60% of such
available surplus.
Available Surplus :
According to Section 2 (6) of the Payment of Bonus Act, 1965, available surplus means
the available surplus computed under Section 5 of the payment of Bonus Act, 1965. As
per Section 5, the available surplus in respect of any accounting year means the gross
profits for that year after deducting thereform the sums referred to in Section 6, viz,
depreciation, development rebate or investment allowance or development allowance,
income tax payable during the year, and such further sums as are specified in Third
Schedule.
To the amount of Gross Profit, so arrived it should be added an amount equal to the
saving in income tax in the preceding accounting in year because of the payment of
bonus.
Question 10
X, a temporary employee drawing a salary of Rs.3,000 per month, in an establishment
to which the Payment of Bonus Act, 1965 applies was prevented by the employers from
working in the establishment for two months during the financial year 2001-2002,
pending certain inquiry. Since there were no adverse findings ‘X’ was re-instated in
service, later, when the bonus was to be paid to other employees, the employers
refuse to pay bonus to ‘X’, even though he has worked for the remaining ten months in
the year. Referring to the provisions of the Payment of Bonus Act, 1965 examine the
validity of employer’s refusal to pay bonus to ‘X’
(Nov. 2002)
Answer
Entitlement for bonus under the Payment of Bonus Act, 1965
Every employee of an establishment covered under the Act is entitled to bonus from his
employer in an accounting year provided he has worked in that establishment for not
less than 30 working days in the year on a salary less than Rs. 3,500 per month.
[Section 2(13) read with Section 8] (This ceiling of Rs. 3,500 has been now
revised to Rs. 10,000, with effect from Nov 2007).
If an employee is prevented from working subsequently reinstated in service,
employer’s statutory liability for bonus cannot be said to have been lost and the
employee concerned shall be entitled to the bonus. (ONGC v. Sham Kumar Sahegal).
Thus based on the above ruling and the provisions of the Act as contained in Section 8,
the refusal by the employers to pay bonus to X is not vaild and he (X) is entitled to get
bonus in the given case for the reasons given above in the provisions, i.e. he has
worked for more than 30 days in a year, drawing salary of less than Rs. 3500 (from

CA-IPCC
November 2007, this amount has been revised to Rs. 10,000) and not
disqualified for any other reason.
Question 11
In an accounting year, a company to which the payment of Bonus Act, 1965 applies,
suffered heavy losses. The Board of Directors of the said company decided not to give
bonus to the employees. The employees of the company move to the Court for relief.
Decide in the light of the provisions of the said Act whether the employees will get
relief? (May 2003)
Answer
Problem on Payment of Bonus.
Section 10 of the Payment of Bonus Act, 1965 provides that subject to the other
provisions of the Act, every employer shall be bound to pay to employee in respect of
the accounting year commencing on any day in 1979 and in respect of any subsequent
year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by
the employee during the accounting year or Rs. 100 (Rs. 60 in case of employees below
15 years of age), whichever is higher. The minimum bonus is payable whether or not
employer has any allocable surplus in the accounting year.
Therefore based on the above provision (Section 10) the question asked in the problem
can be answered as under:
Yes, applying the provisions as contained in Section 10 the employees shall succeed
and they are entitled to be paid minimum bonus at rate 8.33% of the salary or wage
earn during the accounting year or Rs. 100 (Rs. 60 in case of employees below 15
Years of age), whichever is higher.
Question 12
The employer is a banking company. Point out so as to what items are required to be
added to the “Net Profit” by the employer for calculating the “Gross Profit” in
accordance with the First Schedule of the Payment of Bonus Act, 1965. (November
2003)
Answer
Calculation of gross profit in case of banking company as per the first schedule of the
Payment of Bonus Act, 1965;
The following are to be added to the Net Profit as shown in the Profit and Loss Account
after making usual and necessary provisions:
1. Provision for Bonus to employees, Depreciation, Development Rebate Reserve, and
any other Reserve.
2. Bonus paid to employees in respect of previous year, amount debited in respect of
gratuity paid or payable to employees in excess of the aggregate of:
(a) the amount, if any, paid or provided for payment, to an approved gratuity fund;
and
(b) the amount actually paid to employees on their retirement or on termination of
their employees for any reason.
3. Donation in excess of the amount admissible for income tax.

CA-IPCC
4. Capital expenditure (other than capital expenditure on scientific research which is
allowed as deduction under any law for the time being in force relating to direct
taxes) and capital losses bother than losses on sale of capital assets on which
depreciation has been allowed for income tax).
5. Any amount certified by the Reserve Bank in terms of Section 34A(2) of the Banking
Regulation Act, 1949.
6. Losses of, or expenditure relating to any business situated outside India.
7. Add also income, profit or gains (if any) credited directly to published or disclosed
reserves other than:
(i) capital receipts and capital profits (including profits on the sale of capital assets
on which depreciation has not been allowed for income tax).
(ii) profits of, and receipts relating to any business situated outside India.
(iii) income of foreign companies from investment outside India.
Question 13
Describe the procedure provided under the Payment of Bonus Act, 1965 for computing
the number of days for determining the amount of minimum bonus payable to an
employee. How is proportionate reduction in bonus made? (November 2003)
Answer
Computation of number of working days for determining the minimum
bonus etc.
Section 14 of the Payment of Bonus Act, 1965 provides how to compute the number of
working days for purposes of Section 13. Section 13 in turn prescribes a scale whereby
bonus can be proportionately reduced in certain cases. Under Section 14 following days
shall be deemed to be the working days of an employee and shall be counted while
calculating the total working days on which he has been on work for the purpose of
bonus:
(i) Day when he has been laid off under an agreement or by a standing order under
the Industrial Employment (Standing Orders) Act, 1946 or Industrial Disputes Act,
1947 or any other law.
(ii) He has been on leave with salary or wage.
(iii) He has been absent due to temporary disablement caused by accident arising out
of and in the course of his employment and
(iv) The employee has been on maternity leave with salary or wages during the
accounting year.
According to Section 13, where an employee has not worked for all the working days in
an accounting year, the minimum bonus of Rs. 100 or, as the case may be of Rs 60, if
such bonus is higher than 8.33% of his salary or wage for the days he has worked in
that accounting year, shall be proportionately reduced.
Question 14
Examine the powers of Government to grant exemption to an establishment from
payment of bonus under the Payment of Bonus Act, 1965. (November 2000, 2004)
Answer

CA-IPCC
According to section 36 of the Payment of Bonus Act, 1965, if the appropriate
Government having regard to the financial position and other relevant circumstances of
any establishment or class of establishments is of the opinion that it will not be in
public interest to apply all or any of the provisions of the Act, it may by notification in
the official Gazette, exempt for such period as may be specified therein and subject to
such conditions as it may think fit to impose, such establishment or class of
establishments from all or any of the provisions of the Act. There are twostages in
section 36. Viz
(i) The Government shall consider the financial position and other relevant
circumstances of an establishment or class of establishments; and
(ii) The Government should be of the opinion that it would not be in public interest to
apply ail or any of the provisions of the Act.
The expression ‘financial position’ includes loss suffered by the establishment during
the accounting year. The expression ‘other relevant circumstances’ will include every
consideration as to whether the workmen had principally contributed to the financial
loss of the company during that accounting year. If the bonus liability is negligible
compared to the loss suffered, company should not be relieved of liability to pay
minimum bonus. If the iosses sustained by the employer is not due to any misconduct
on the part of the employees, the employer is liable to pay statutory minimum bonus
[J.K. Chemicals Ltd. Vs. Government of Maharasthra (1996) Bombay H.C]
Question 15
On 1st January. 2002, Aryan Textiles Ltd. agreed with the employees for payment of an
annual bonus linked with production or productivity instead of bonus based on profits
subject to the limit of 30% of their salary wages during the relevant accounting year. It
was also agreed by the employees that they will not claim minimum bonus stated
under Section 10 of the Payment of Bonus Act, 1965. As per the agreement the
employees of Aryan Textiles Ltd claimed annual bonus linked with production or
productivity in the relevant accounting year. On refusal of the company the employees
of the company moved to the court for relief.
Decide in reference to the provisions of the payment of Bonus Act, 1965 whether the
employees will get the relief? Inspite of the aforesaid agreement whether the
employees are still entitled to receive minimum bonus. (November 2004)
Answer
Problem relating to bonus linked with production or productivity
(Section 31A)
As per Section 31 (A) of the Payment of Bonus Act, 1965, there may be an agreement
or settlement by the employees with their employer for payment of an annual bonus
linked with production or productivity in lieu of bonus based on profits, as is payable
under the Act. Accordingly, when such an agreement has been entered into the
employees are entitled to receive bonus as per terms of the agreement/settlement,
subject to the following restriction imposed by Section 31A;
(a) any such agreement/settlement whereby the employees relinquish their right to
receive minimum bonus under Section 10, shall be null and void in so far as it
purports to deprive the employees of the right of receiving minimum bonus.

CA-IPCC
(b) If the bonus payable under such agreement exceed 20% of the salary/wages
not entitled to the excess over 20% of salary/wages.
In the given case Aryan Textile Ltd. agreed with the employees for payment of an
annual bonus linked with production or productivity instead of based on profits subject
to the limit of 30% of their salary/ wages during the relevant accounting year.
According to Section 31A the maximum bonus under this provision can be given which
should not exceed 20% of the salary/wages earned by the employee during the
relevant accounting year. Hence, the maximum bonus may be paid upto 20% of the
salary/wages. If the company agrees to pay more than 20% then it will be against the
provisions of the Payment of Bonus Act, 1965.
The employees of Aryan Textiles also agreed not to claim minimum bonus stated in
Section 10 of the Payment of Bonus Act, 1965 such an agreement shall be null and void
as it purports to deprive the employees of their right of receiving minimum bonus.
Hence, the relief may be given by the court, as regards to the payment of bonus to the
employees, based on the production or productivity, if it is agreed, subject to a
maximum of 20%. The employees will also be entitled legally to claim bonus which is
minimum prescribed under Section 10 of the Act, even though they have relinquished
such right as per the agreement.
Question 16
Define an “Establishment in public sector”. What are the circumstances when the
Payment of Bonus Act, 1965 becomes applicable to such an establishment?
(May 2005)
Answer
Section 2(16) of the Payment of Bonus Act, 1965 defines ‘establishment in public
sector’ to mean an establishment owned, controlled or managed by:
(a) a Government company as defined in Section 617 of the Companies Act, 1956;
(b) a Corporation in which not less than 40% of its capital is held (whether singly or
taken together) by -
(i) the Government; or
(ii) the Reserve Bank of India; or
(iii) a Corporation owned by the Government or the Reserve Bank of India.
The provisions of the Payment of Bonus Act, 1965 do not ordinarily apply to an
establishment in public sector. However, if the following two conditions are
satisfied by such establishment in any accounting year, the provisions of the Act
shall apply to such establishment as they apply to an establishment in the private
sector:
(i) If in any accounting year, an establishment in the public sector sells goods
produced or manufactured by it or renders any services, in competition with an
establishment in private sector; and
(ii) the income from such sale or services is not less than 20% of the gross income
of the establishment in public sector in that year. (Section 20)
Question 17

CA-IPCC
Explain the rules of set on and set off of allocable surplus under the Payment of Bonus
Act. (May
2005)
Answer
Where for any accounting year, the allocable surplus exceed the amount of maximum
bonus payable to the employees in the establishment under Section 11 of the Payment
of Bonus Act, 1965, the excess shall, subject to the limit of 20% of the total salary or
wage of the employees employed in the establishment in that accounting year, be
carried forward for being set on in the succeeding accounting year and so on up to and
inclusive of the 4th accounting year. This excess is to be utilized for the purpose of
payment of bonus as illustrated in the 4th Schedule.
There may be a case where there is no allocable surplus or where the allocable surplus
falls short of the amount of minimum bonus payable to the employee under section 10
and there is no amount or sufficient amount carried forward and set on under the
aforesaid provisions which could be utilized for paying minimum bonus. In such a
situation minimum amount or the deficiency as the case may be, shall be carried
forward for being set off in the succeeding accounting year and so on up to and
inclusive of the 4th accounting year in the manner illustrated in the 4th Schedule.
Where in any accounting year any amount has been carried forward and set on and set
off under Section 15, in calculating bonus for the succeeding accounting year, the
amount of set on and set off carried from the earliest accounting year shall first be
taken into account. [Section 15(4)].

CA-IPCC
Question 18
Explain the meaning of “Accounting year” under the Payment of Bonus Act, 1965.
(November 2005
Answer
Section 2(i) of the Payment of Bonus Act, 1965 defines ‘accounting year’. It means,
(i) in relation to a corporation, the year ending on the day on which the books of
Accounts of the Corporation are to be closed and balanced.
(ii) In relation to a company, this term means a period in respect of which any profit or
loss account of the company laid before it in an annual general meeting is made up
whether that period is a year or not.
(iii) In any other case (a) the year commencing on the first day of April, or (b) if the
accounts of an establishment maintained by the company thereof are closed and
balanced on any day other than the 31st day of March then at the option of the
employer, the year ending on the day on which its Accounts are so closed and
balanced.
If, however, the said option is once exercised by the employer, it cannot be exercised
once again, except with the permission in writing of the prescribed authority and upon
such conditions as that authority may think fit. In other words, the exercise of the said
option can only take place on obtaining the previous written permission of the
prescribed authority, and the prescribed authority may impose such conditions as it
may think fit.
Question 19
Explain the provisions of the payment of Bonus Act, 1965 relating to the following:
(i) Adjustment of Customary Bonus against bonus payable under the Act.
(ii) What is the time limit within which payment of bonus due to an employee under
the Act, be paid? (November
2005)
Answer
(i) Adjustment of customary or Interim Bonus against bonus payable under
the Act (Section 17, Payment of Bonus Act, 1965): If in any accounting year,
an employer has paid any puja bonus or other customary bonus to any employee,
then the former shall be entitled to deduct the amount of bonus so paid from the
amount of bonus payable by him to the employee under this Act in respect of that
accounting year. The employee shall be entitled to receive only the balance. The
employer can do the same thing even in a case where he has paid off the bonus
payable under this Act to an employee before the date on which such customary
bonus payable becomes payable.
(ii) Time limit for Payment of Bonus (Section 19): The employer is bound to
pay his employee bonus within one month from the date on which the award
becomes enforceable or the settlement comes into operation, if a dispute regarding
payment of bonus is pending before any authority under Section 22. In other cases,
however, the payment of the bonus is to be made within a period of 8 months from
closing of the accounting year. But this period of 8 months may be extended upto

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a maximum of 2 years by the appropriate Government or by any authority specified
by the appropriate Government. This extension is to be granted on the application
of the employer and only for sufficient reasons.
Question 20
Prakash Chandra is working as a salesman in a company on salary basis. The following
payments were made to him by the company during the previous financial year –
(i) overtime allowance,
(ii) dearness allowance
(iii) commission on sales
(iv) employer’s contribution towards pension fund
(v) value of food.
Examine as to which of the above payments form part of “salary” of Prakash Chandra
under the provisions of the payment of Bonus Act, 1965.
(November 2005)
Answer
Computation of Salary / Wages: According to Section 2(21) of the Payment of
Bonus Act, 1965 salary and wages means all remuneration other than remuneration in
respect of overtime work, capable of being expressed in terms of money, which would
if the terms of employment, express or implied, were fulfilled, be payable to an
employee in respect of his employment, or of work done in such employment. It
includes dearness allowance, i.e. all cash payment by whatever name called, paid to an
employee on account of a rise in the cost of living. But the term excludes:
(i) Any other allowance which the employee is for the time being entitled to;
(ii) The value of any house accommodation or of supply of light, water, medical
attendance or other amenities of any service or of any concessional supply of food
grains or other articles;
(iii) Any traveling concession;
(iv) Any contribution paid or payable by the employer to any pension fund or for benefit
of the employee under any law for the time being in force.
(v) Any retrenchment compensation or any gratuity or other retirement benefit payable
to the employee or any ex-gratia payment made to him; and
(vi) Any commission payable to the employee.
It may be noted that where an employee is given, in lieu of the whole or part of the
salary or wage payable to him, free food allowance or free food by his employer, such
food allowance or the value of such food shall be deemed to form part of the salary or
wage for such employee.
In view of the provisions of Section 2(21) explained above, the payment of dearness
allowance and value of free food by the employer forms part of salary of Prakash
Chandra while remaining three payments i.e. payment for overtime, commission on
sales and employer’s contribution towards pension funds does not form part of his
salary
Question 21

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Explain the procedure relating to computation of “working days’ for the purpose of
payment of bonus under the Payment of Bonus Act, 1965. Can there be a deduction in
the amount of bonus on the ground that the employee has not worked for all working
days in an a year?
(May 2006)
Answer
Computation of working days: Section 14 of the Payment of Bonus Act, 1956
provides for computation of number of working days for the purposes of Section 13.
Section 13 in turn prescribes a scale whereby bonus can be proportionately reduced in
certain cases. Under Section 14, following days shall be deemed to be the working
days of an employee and shall be counted while calculating the total working days on
which he has been on work for the purpose of bonus:
(i) day when he has been laid off under and agreement or by a standing order under
Industrial Employment (Standing orders) Act, 1946 or Industrial Dispute Act, 1947
or any other law,
(ii) he has been on leave with salary or wage,
(iii) he has been absent due to temporary disablement caused by accident arising out
of and in the course of his employment and
(iv) the employee has been on maternity leave with salary or wages during the
accounting year.
As per Section 13, where an employee has not worked for all the working days in an
accounting year, the minimum bonus of Rs. 100 or, as the case may be or Rs. 60, if
such bonus is higher than 8.33% of his salary or wage for the days he has worked in
that accounting year shall be proportionately reduced.
Both Section 13 and 14 do not cover a case where an employee was prevented from
working by reason of an illegal order of termination. If an employee by himself and on
his volition has not worked on all the working days in an accounting year, then the
formula prescribed in Section 13 read with section 14 has to be applied. But where an
employee was ready and willing to work, but for reasons beyond his control was unable
to work gets the eligibility for bonus under Section 8 of the Act, it cannot be said that
section 14 is bar for such a claim.
Question 22
Referring the provisions of the Payment of Bonus Act, 1965, state whether the
following persons are entitled to bonus under the Act:
(i) An apprentice;
(ii) An employee dismissed on the ground of misconduct;
(iii) A temporary workman;
(iv) A piece-rated worker. (November 2006)
Answer
(i) An Apprentice is not entitled to bonus [Wheel RIM Co. Vs. Govt. of Tamil Nadu
(1971)]

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(ii) An employee dismissed on the ground of misconduct is disqualified for any; bonus.
[Pandian Roadways Corporation Ltd. Vs. Presiding Officer (1996)]
(iii) A temporary workman is entitled to bonus on the basis of the total number of
days worked by him.
(iv) A piece-rated worker is entitled to bonus. [Mathurads Kani Vs. L.A. Tribunal
(1958)]
Question 23
Explain the provisions of the Payment of Bonus Act, 1965 relating to ‘Minimum’ and
‘Maximum’ amount of bonus payment to an employee, for an accounting year.
(November 2006)
Answer
According to the Section 10 of the Payment of Bonus Act, 1965, subject to the other
provisions of the Act, every employer shall be bound to pay to every employee in
respect of every accounting year, minimum bonus which shall be 8.33% of the salary or
wage earned by the employee during the accounting year or Rs. 100 whichever is
higher, whether or not the employer has any allocable surplus in the accounting year.
In case of an employee who has not completed 15 years of age at the beginning of
accounting year, he will be entitled to a minimum bonus which shall be 8.33% of the
salary or wage during the accounting year or Rs. 60/- whichever is higher.
Even if the employer suffers losses during the accounting year he is bound to pay
minimum bonus as prescribed by Section 10 [State V. Sardar Dalip Singh Majilhia
(1979)]
The maximum bonus payable to an employee in an accounting year is 20% of his
salary/wages as defined under the Act.
Question 24
Examine whether the Payment of Bonus Act, 1965 be applicable to the following cases:
(i) J, who is working in a social welfare organization.
(ii) D, an employee employed by an establishment engaged in an industry carried on by

a department of the Central Government. (May 2007)
Answer
(i) As per the provisions contained in Section 32 (v) (c) of the Payment of Bonus Act,
1965, ‘J’ is not entitled to any bonus as the said Act is not applicable to social
welfare organization.
(ii) Similarly the said Act is not applicable to the employees engaged by a Department
of the Central Government vide Section 32 (iv).

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Question 25
During the accounting year 2005-06, XYZ Limited to which the Payment of Bonus Act,
1965 applies, suffered heavy losses. The Board of Directors of the company decided
not to pay any bonus to its employees. The employees moved the Court for relief.
Referring to the provisions of the Act, decide whether the employees of the company
would be given any relief by the Court? (May 2007)
Answer
Yes, They will succeed. Even if the employer suffers losses during the accounting year he
is bound to pay minimum bonus as prescribed by section 10 of the payment of Bonus Act,
1965. i.e.8.33% of the basic wages (State Vs Sardar Dalip Singh Majilhia, 1979 .
Question 26
Decide with reasons in the light of the Payment of Bonus Act, 1965 whether the
following persons are entitled for bonus:
(i) A University teacher,
(ii) An employee of the 'NABARD',
(iii) A reinstated employee without wages for the period of dismissal.
(iv) A retrenched employee who worked for 45 days in a year on a salary of Rs. 4,000
per month.
(v) An apprentice. (November

2007)
Answer
Every employee of an establishment covered under the Payment of Bonus Act, 1965 is
entitled to bonus from his employer in an accounting year provided he has worked in
that establishment for not less than thirty working days in the year on a salary less that
Rs. 3,500 per month. [Section 2(13) and Section 8] (Note: This amount has been
revised to Rs. 10,000 now)
In the given problem a University teacher and an employee of the NABARD are not
entitled for bonus because the employees of Universities and other educational
institutions and employees of the Agricultural Refinance Corporation are excluded from
the operation of the Act as per Section 32 of the Payment of Bonus Act, 1965.
A reinstated employee without wages for the period of dismissal is also not entitled for
bonus because only a dismissed employee reinstated with back wages is entitled to
bonus. [Gannon India Ltd. Vs. Niranjan Das [1984] 2LLJ 223]. In this case the employee
has been reinstated without wages.
A retrenched employee who worked for 45 days in a year on a salary of Rs. 4,000 per
month is also not entitled for because he has worked for qualifying days i.e. 30 days
but his salary is higher than prescribed limit (Rs. 3500 per month) in the Act. (Under
the revised wage ceiling mentioned in the note above, this employee will be
eligible for bonus).

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An apprentice is not entitled to bonus [Wheel & RIM Co. vs. Government of Tamil Nadu
[1971].
Question 27
A is an employee of a company. The amount of the bonus payable to A during the year
2006-07 is Rs. 10,000, but the company paid him Rs. 7,000 only and a sum of Rs. 3,000
was deducted from bonus against the loss suffered by the company due to misconduct of
A during the same accounting year. A files a suit against the company for recovery of the
deducted amount. Decide whether A would be given any relief by the court under the
provisions of the Payment of Bonus Act, 1956? What will be your answer, if the losses are
related to the accounting year 2005-06?
(November 2007)
Answer
As per the Payment of Bonus Act, 1965, in an any accounting year, if an employee is
found guilty of misconduct causing financial loss to the employer, then the employer
can lawfully deduct the amount of loss from the amount of bonus payable by him to the
employee in respect of that accounting year only. In this case, the employee shall get
only the balance, if there be any (Section 18).
After application of the above provision it is clear that 'A' will not get any relief from
the court because employer has the right to deduct the said losses from the bonus of
employee.
In the second case, A will get relief from the Court because the losses are related to the
accounting year 2005-06. As per the provision, the employers are entitled to deduct
the losses incurred due to misconduct of the employee in the same accounting year. In
this problem bonus payable year and accounting year are different.
Question 28
What are the provisions regarding set on and set off of the allocable surplus under the
Payment of Bonus Act, 1965 ? (May 2008)
Answer
Set on and set off of allocable surplus
Where for any accounting year the allocable surplus exceeds the amount of maximum
bonus payable to the employees in the establishment under Section 11, then the
excess shall, subject to a limit of 20% of the total salary or wage of the employees
employed in the establishment in that accounting year, be carried forward for being set
on in the succeeding accounting year and so on up to and inclusive of the 4th
accounting year. This excess is to be utilized for the purpose of payment of bonus, in
the manner illustrated in Fourth Schedule.
There may be a case where there is no allocable surplus or where the allocable surplus
falls short of the amount of minimum bonus payable to the employee under Section 10
and there is no amount or sufficient amount carried forward and set on under the

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aforesaid provisions which could be utilized for paying minimum bonus. In such a
situation minimum amount or the deficiency as the case may be, shall be carried
forward for being set off in the succeeding accounting year and so on up to and
inclusive of the 4th accounting year in the manner illustrated in Fourth Schedule.
Where in any accounting year any amount has been carried forward and set on or set
off under this Section, then in calculating bonus for the succeeding accounting year,
the amount of set on or set off carried forward from the earliest accounting year shall
first be taken into account.
Question 29
X is an employee in a Company. The amount of bonus payable to him during the year
2007-08 is Rs.14,000. The company deducted a sum of Rs.4,000 against the “Puja
Bonus” already paid to him during the said year and paid the remaining amount. X
files a suit against the company for recovery of the deducted amount. Decide, under
the Payment of Bonus Act, 1965, whether X would be given any relief by the Court?
(May 2008)
Answer
Deduction of Bonus
The problem as given in the question is based on Section 17 of the Payment of Bonus
Act, 1965. As per Section 17, if in any accounting year, an employer has paid any puja
bonus or other customary bonus to any employee, then the former shall be entitled to
deduct the amount of bonus so paid from the amount of bonus payable by him to the
employee under this Act in respect of that accounting year. The employee shall be
entitled to receive only the balance. The employer can do the same thing even in a
case where he has paid off the bonus payable under this Act to an employee before the
date on which such bonus payable becomes payable.
In the instant case X would not get any relief from the court because employer is
empowered to deduct Rs.4,000/- from the total bonus (Rs.14,000) of Mr. X.
Question 30
Can the Payment of Bonus Act be made applicable to an establishment in the public
sector?
(November 2008)
Answer
Applicability to an establishment in the public sector
Yes, in certain cases. According to section 20, in any accounting year if an

establishment in public sector:
(i) sells any goods produced or manufactured by it or
(ii) renders any services in competition with an establishment in private sector, and, if the
income from such sale or service or both is not less than 20% of the gross income of

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establishment in the public sector, then the provisions of the Bonus Act shall apply in
relation to establishment in private sector [sec 20(1)]. Save as otherwise provided
above, nothing in this Act shall apply to the employees employed by any establishment
in the public sector [sec 20(2)].
Question 31
The management of Shakthi Mills Ltd. entered into an agreement with their employees
to pay them bonus based on production in lieu of Bonus based on profits, from the
accounting year 2007. The employees further agreed to forego their right to receive
minimum bonus and instead accept 25% of their salary/wage as bonus based on
productivity. Is such an agreement valid? Examine in the light of the provisions of the
Payment of Bonus Act, 1965.
(November 2008)
Answer
Payment of bonus linked with productivity
No, such an agreement is null and void. The problem is based on Section 31A of the
Payment of Bonus Act, 1965 which allows an agreement between employers and
employees for payment of bonus linked with productivity. But such payment is subject
to two restrictions :
(i) That such agreement whereby the employees relinquish their right to receive
minimum bonus under Sec.10, shall be null and void.
(ii) If the bonus payable under such agreement exceeds 20% of the salary/wages
not entitled to the excess over 20% of the salary/wages.
Accordingly, in the given problem, the agreement to forego the right of receiving
minimum bonus is null and void. The employees shall not be entitled to receive the
excess over 20% of salary/wages incase of bonus payable linked with productivity.

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6
THE EMPLOYEES PROVIDENT FUND AND MISCELLANEOUS
PROVISIONS ACT, 1952
Question 1
Who determines the money due from an employer under the Employees Provident
Fund and Miscellaneous Provisions Act, 1952? State the factors considered by the
authorities at the time of determining the amount. (May, 2000)
Answer
Determination of moneys due from employer (Section 7A, E.P.F. & M.P
Act, 1952):
Authorities empowered to determine the amount due from an employer under the
provisions of the Act and the scheme include Central P.F. Commissioner, Deputy P.F.
Commissioner, Assistant P.F. Commissioner & Regional P.F. Commissioner.
The involves decisions on:
(i) amount due as contribution
(ii) date from which same is due
(iii) administration charges
(iv) amount to be transferred under Section 15 or 17 of Act.
(v) any other charges payable by employer,
The authorities may conduct such inquiries as necessary and have powers such as are
vested in Court.
Employer must be given a reasonable opportunity of representing his case.
Where any party fails to appear etc., the officer may decide on basis of evidence and
documents put before him.
An ex pane order against employer may be set aside on application within 3 months of
receiving order by him by showing sufficient cause. A fresh date shall be given for
proceeding with inquiry.
As the above “proceedings are of quasi-judicial in nature and vitally affect and vitally
affect the rights of parties, the principles of natural justice must be strictly followed in
deciding the dispute.
Question 2
Explain the provisions of Employees' Provident Funds and Miscellaneous Provisions Act,
1952 with regard to determination of 'Escaped Amount' after an officer has passed an
order concerning 'Determination of Amount' due from an Employer under the Act.
(November, 2000)

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Answer
Determination of escaped amount under section 7C of the Employees
Provident Funds and Miscellaneous Provisions Act, 1952: Where an order
determining the amount due from an employer under Section 7A or Section 7B has
been passed and if the officer who passed the order:
(a) has reasons to believe that by reason of omission or failure on the part of the
employer to make any document or report available, or to disclose, fully and truly,
all material facts necessary for determining the correct amount due from the
employer, any amount so due from such employer for any period has escaped his
notice.
(b) has in consequence of information in his possession, reason to believe that any
amount to be determined under Section 7A or Section 7B has escaped from his
determination for any period notwithstanding that there has been no omission or
failure as mentioned in clause (a) on the part of the employer.
He may, within a period of five years from the date of communication of the order
passed under Section 7A or Section 7B, re-open the case and pass appropriate order re-
determining the amount due from the employer in accordance with provisions of this
Act. However, no order re-determining the amount due from the employer shall be
passed under this section unless the employer is given a reasonable opportunity of
representing his case.
Question 3
Explain the salient features of Employee’s Pension Scheme as provided under the
Employees Provident Funds and Miscellaneous Provisions Act. 1952.(May 2001)
Answer
The Scheme called the Employees’ Pension Scheme in accordance with the provisions
of Section 6A of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952
provides for:
(a) superannuation pension, retiring pension or permanent total disablement pension
to the employees of any establishment or class of establishments to which the Act
applies; and
(b) widow or widower’s pension children pension or orphan pension payable to the
beneficiaries of such employees.
The Act further provides that notwithstanding anything contained in Section 6 of the
Act, there shall be established, as soon as may be after framing of the Pension Scheme,
a Pension Fund into which there shall be paid, from time to time, in respect of every
employees who is a member of the Pension Scheme :
(a) such sums from the employer’s contribution under “Section-6, not exceeding 8-
1/3% of the basic wages dearness allowance and retaining allowance, if any, of the
concerned employees, as may be specified in the Pension Scheme; such sums as
are payable by the employers of exempted establishments under Sub-section (6) of
Section 17.
(b) the net assets of the Employees’ Pension Fund as on the date of the establishment
of the Pension Fund:

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(c) such sums as the Central Government may, after due appropriation by Parliament
by law in this behalf, specify.
Further, the Pension Scheme may provide for all or any of the matters specific in
Schedule III.
Question 4
Explain the provisions of the Employees’ Provident Funds and Miscellaneous Provisions
Act, 1952 relating to:
(i) Transfer of accounts of cm employee in case of his leaving the employment and
faking up employment in another establishment.
(ii) Liability of a transferee employer in case of transfer of establishment by an
employer.
(November, 2001)
Answer
Transfer of accounts of an employee and liability of transferee employer under
empioyees’ Provident Funds and Misc. Provisions Act, 1952:
Transfer of Accounts: (Section 17-A)
Section I7A of the Act provides for the transfer of accounis of an employee in case if his
leaving the employment and taking up employment in nnother establishment and to
deal with the case of an establishment to which the Act applies and also to which it
does not apply. The option to get the amount transferred is that of the employee.
Where an employee of an establishment to which the Act applies leaves his
employment and obtains re-employment in another establishment to which the Act
does not apply, the amount of accumulations to the credit of such employee in the
Fund or, as the case may be, in the provident fund in the establishment left by him
shall be transferred to tile credit of his account in the provident fund of the
establishment in winch he is re-employed. if the employee so desires and the rules in
relation to that provident fund permit such transfer. This transfer has to be made with
in such time as may be specified by the Central Government in this behalf.
Conversely, when an employee of an establishment to which this Act does not apply
leaves his employment and obtains re-employment in another establishment to which
this Act applies, the amount of accumulations to the credit of such employee in the
provident fund of the establishment left by him, if the employee so desires that the
rules in relation to such provident fund permit, may be transferred to the credit of his
account in the fund or as the case may be, in the provident fund of the establishment
in which he is re-employed.
Liability of a transferee employer in case of transfer of establishment
by the employer. (Section 17-B).
Where an employer in relation to an establishment, transfers that establishment in
whole or in part by sale, gift, lease or licence or in any other manner whatsoevur, the
employer and the person to whom the establishment is so transferred shall Jointly or
severally be liable to pay the contribution and other sums due from the employer under
any provisions of the Act of the Scheme or the Pension Scheme, as the case may be, in
respect of the period up to the date of such transfer. It is provided that the liability of
the transferee shall be limited to the value of the assets obtained by him by such
transfer.

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Section 17-B deals with the liability of transferor and transferee in regard to the money
due under-
(a) the Act: or
(b) the Scheme;
(c) Pension Scheme.
in the case of transfer of the establishment brought in by sale, gift, lease, or any other
manner whatsoever, the liability of the transferor and the transferee is joint and
several, but is limited with respect to the period upto the date of the transferor. Also
the liability of the transferee is further limited to the assets obtained by him from the
transfer of the establishment.
Question 5
State the establishments to which the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952, applies. (May, 2002)
Answer
Establishments to which the Employees Provident Funds, Miscellaneous Provisions Act
7952 applies: The Employees Provident Funds and Miscellaneous Provisions Act, 1952
applies to the following establishments:
(1) every establishment which is a factory engaged in any industry specified in
Schedule I and in which 20 or more persons are employed; and .
(2) any other establishment which employs 20 or more persons or class of such
establishments which the Central Government may, by notification in the Official
Gazette, specify in this behalf.
However, the Central Government may, after giving two months’ notice of its intention
to do so, apply the provisions of this Act to any establishment with less than 20 persons
in the employment.
Notwithstanding anything stated above or in sub-section (1) of Section 16 of the Act,
where it appears to the Central Provident Fund Commissioner, whether on an
application made to him in this behalf or otherwise, that the employer and the majority
of employees in relation to any establishment, have agreed that the provisions of this
Act should be made applicable to the establishment, he may, by notification in the
Official Gazette, apply the provisions of this Act to the establishment on or from the
date of such agreement or from any subsequent date specified in such agreement.
An establishment to which this Act applies must continue to be governed by this Act,
even if the number of persons employed therein at any time falls below 20.
Question 6
Explain the provisions of the Employees’ Provident Fund and Miscellaneous Provisions
Act, 1952 authorising certain employers to maintain a Provident Fund Account. (May,
2002)
Answer
Section 16-A of the Employee Provident Fund and miscellaneous Provisions Act, 1952
empowers the Central Government to authorise to certain employers to maintain a P.F.
Account. This section states, the Central Government may, on an application made to it
in this behalf by the employer and the majority of employees in relation to an

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establishment employing one hundred or more persona, authorise the employer by an
order in writing, to maintain a provident fund account in relation to the establishment
subject to such terms and conditions, as may be specified in the scheme.
No authorization shall, however, be made under this sub-section, if the employer of
such establishment had committed any default in the payment of provident fund
contribution or had committed any other offence under this Act during the three years
immediately preceding the date of such authorization.
Where an establishment is authorised to maintain a provident fund account as
aforesaid, the employer in relation to such establishment shah maintain such account,
submit such return, deposit the contribution in such manner, provide for such facilities
for inspection, pay such administrative charges, and abide by such other terms and
conditions, as may be specified in the scheme.
Any authorization made under this Section may be cancelled by the Central
Government by order in writing if the employer fails to comply with any of the terms
and conditions of the authorization or where he commits any offence under any
provisions of this Act.
Before cancellation the authorization, the Central Government shall give the employer
a reasonable opportunity of being heard.
Question 7
State the kinds of establishments which are not covered under the Employee’s
Provident Funds and Miscellaneous Provisions Act, 1952. (Nov. 2002)

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Answer
Establishments not covered under the Employee’s Provident Funds and
Miscellaneous Provisions Act, 1952 :
The Act is not applicable to the following establishments:
(i) any establishment registered under the Co-operative Societies Act, 1912, or under
any other law for the time being in force in any state relating to co-operative
societies, in any state, employing less than fifty person and working without the aid
of power; or,
(ii) any other establishment belonging to or under the control of the Central
Government or a State Government and whose employees are entitled to the
benefit of contributory provident fund or old age pension in accordance with any
scheme or rule framed by the Central Government or the State Government
governing such benefits, or
(iii) any other establishment set up under any Central, Provincial, or State Act and
whose employees are entitled to the benefits of contributory provident fund or old
age pension in accordance with any scheme or rules famed under the Act
governing such benefits, or
(iv) any other establishment newly set-up, until the expiry of a period of three years
from the date on which such establishment is, or has been set up.
(v) section 16(2) lays down that if the Central Government is of the opinion that having
regard to the financial position of any class of establishments or other
circumstances of the case, it is necessary or expedient so to do, it may exempt that
class of establishments from the operation of this Act for such period as may be
specified in the notification in the official gazette. The exemption can be granted
only through notification in the official gazette.
Question 8
In what way is the “Employee’s Deposit-linked Insurance Scheme” regulated under the
provisions of the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952?
Explain. (Nov. 2002)
Answer
Provisions of the Employee’s Provident Funds and Miscellaneous
Provisions Act, 1952 relating to Employees deposit linked insurance
scheme.
Section 6-C of the Act, 1952 provides that:
1. The Central Government may, by notification in the Official Gazette, frame a
Scheme to be called the Employees’ Deposit-linked Insurance Scheme for the
purpose of providing life insurance benefits to the employees of any establishment
or class of establishments to which the Act applies.
2. There shall be established, as soon as may be after the framing of the Insurance
Scheme, a Deposit-linked Insurance Fund into which shall be paid by the employer
from time to time in respect of every such employee in relation to whom he is the
employer, such amount, not being more than one per cent of the aggregate of the
basic wages, dearness allowance and retaining allowance (if any) for the time being
payable in relation to such employee as the Central Government may, by
notification in the Official Gazette, specify.

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3. The employer shall pay into the Insurance Fund such further sums of money, not
exceeding one-fourth of the contribution which he is required to make under sub-
section (2), as the Central Government may, from time to time, determine to meet
all the expenses in connection with administration of the Insurance Scheme other
than the expenses towards the cost of any benefits provided by or under that
Scheme.
4. The Insurance Fund shall vest in the Central Board and be administered by it in
such manner as may be specified-in the Insurance Scheme.
5. The Insurance Scheme may. provide for all or any of the matters specified in
Schedule IV.
6. The Insurance Scheme may provide that any of its provisions shall take effect
either prospectively or retrospectively on such date as may be specified in this
behalf in that Scheme.
Question 9
How is the Central Board of Trustees constituted under the provisions of the Employees
Provident Fund and Miscellaneous Provisions Act, 1952? Explain its composition
(May 2003).
Answer
The Central Government may, by notification in the Official Gazette, constitute with
effect from such date as may be specified therein, a Board of Trustees for the
territories to which the Employees Provident Fund and Miscellaneous Provisions Act,
1952 extends. The Central Board of Trustees consisting of the following persons as
members, viz.
(a) A Chairman and a Vice-Chairman to be appointed by the Central Government;
(b) The Central Provident Commissioner, ex officio;
(c) Not more than 15 persons appointed by the Central Government from amongst its
officials;
(d) Not more than 15 persons, representing Government of such State as the Central
Government may specify in this behalf, appointed by the Central Government.
(e) 10 persons representing employers of the establishments to which the Scheme
applies, appointed by the Central Government after consultation with such
organizations of employers as may be recognized by the Central Government in this
behalf.
(f) 10 persons representing employees in the establishments to which the Scheme
applies, appointed by the Central Govt. after consultation with such organizations
of employees as may be recognized by Central Government in this behalf.
Question 10
Describe the provisions relating to contribution by the employees and the employer
under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. (May
2003)
Answer

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According to section 6 of the EPF & MP Act, 1952, the employees’ contribution to the
fund shall be 10% of the basic wage, dearness allowance and retaining allowance (if
any). An employee can at his will contribute beyond 10 if the scheme makes provision
therefore subject to the conditions that the employer shall not be under an obligation
to pay any contribution over and above his contribution payable under this Section (i.e.
10%). This rule will prevail irrespective of whether the employer employee the person
directly or through contractor.
According to the first proviso to the Section 6, the Central Government may, however,
raise the aforesaid percentage of contribution from 10% to 12% in respect of any
establishments. It may do so after making such enquiries as it deems fit.
The following points are relevant in this regard:
(i) Where the amount of any contribution involves a fraction of rupee, the scheme may
provide for the rounding off of such fraction to the nearest rupee, half rupee or a
quarter rupee.
(ii) Dearness allowance includes cash value of any food concession allowed to the
employee.
(iii) Retaining allowance means an allowance payable for the time being to an
employee of any factory or other establishment during any period in which the
establishment is not working for retaining his services.
Question 11
What are the power of an “Inspector” under the Employees’ Provident Funds and
Miscellaneous Provisions Act, 1952? (November 2003)
Answer
Powers of Inspector:
Under Section 13 of the Employees Provident Funds and Miscellaneous Provisions Act,
1952 the Inspector is appointed by the appropriate Government for the purpose of the
Act and the Scheme. Under sub-section (2) of the said section, the Inspector has the
following powers:
1. To collect information and require the employer or any contractor from whom any
amount is recoverable under section 8A to furnish such information, as he may
consider necessary.
2. To enter and search any establishment or any premises connected therewith.
3. To require any one found in charge of the above - mentioned establishment or
premises to produce before him for examination any accounts, books, registers or
other documents.
4. To examine the employer or contractor from whom any amount is recoverable.
5. To make copies of or take extract from any book, register or any other document
maintained in relation to the establishment and also to seize such documents as he
may consider relevant.
6. To exercise such other powers as the scheme may provide.
Question 12

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An employee leaves the establishments in which he was employed and gets
employment in another establishment wherein he has been employed. Explain the
procedure laid down in the Employees’ Provident Fund and Miscellaneous Provisions
Act, 1952 in this relation.
(November 2003)
Answer
Transfer of accumulated amount to the credit of Employees Provident Fund
on change of employment: Section 17-A of the Employees’ Provident Funds and
Miscellaneous Provisions Act, 1952 provides for the transfer of accounts of an
employee in case of his leaving the employment and taking up employment and to deal
with the case of an establishment to which the Act applies and also to which it does not
apply. The option to get the amount transferred is that of the employee. Where an
employee of an establishment to which the Act applies leaves his employment and
obtains re-employment in another establishment to which the Act does not apply, the
amount of accumulations to the credit of such employees in the Fund or, as the case
may be, in the provident Fund in the establishment left by him shall be transferred to
the credit of his account in the provident fund of the establishment in which he is re-
employed, if the employee so desires and the rules in relation to that provident fund
permit such transfer. The transfer has to be made with in such time as may be
specified by the Central Govt..in this behalf. [Sub-Section (I)].
Conversely, when an employee of an establishment to which the Act does not apply
leaves his employment and obtains re-employment in another establishment to which
this Act applies, the amount of accumulations to the credit of such employee in the
provident fund of the establishment left by him, if the employee so desires and the
rules in relation to such provident fund permit, may be transferred to the credit of his
account in the fund or as the case may be, in the provident fund of the establishment
in which he isemployed. [Sub-Section (2)].
Question 13
Is the amount standing to the credit of a member of the Provident Fund attachable in
the execution of decree or order of the Court? Examine the law, on this point, laid
down in the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. (May
2004)
Answer
Attachment of Provident Fund
According to Section 10 of E.P.F. & M.P. Act, 1952 the amount standing to the credit of
any member in the fund or of any exempted employee in a provident fund shall not in
any way be capable of being assigned or charged and shall not be liable to attachment
under any decree or order of any court in respect of any debt or liability incurred by the
member or the exempted employee, and neither the official assignee appointed under
the Presidency Towns Insolvency Act nor any receiver appointed under the Provincial
Insolvency Act shall be entitled to or have any claim on, any such amount.
The amounts standing to the credit of aforesaid categories of persons at the time of
their death and payable to their nominees under the scheme or the rules vest in
nominees, and the amount shall be free from any debt or other liability incurred by the
deceased or the nominee before the death of the member or of the exempted

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employee and shall also not be liable to attachment under any decree or order of any
court.
Question 14
Explain the concept of “Basic Wages” under the provisions of the Employees’ Provident
Funds and Miscellaneous Provisions Act, 1952. (May 2004)
Answer
Basic Wages under Employees Provident Fund & Miscellaneous
Provisions Act, 1952
As per the provision of Section 2(b) of E.P.F. and M.P. Act, 1952 ‘Basic Wages’ means
all emoluments which are earned by an employee while on duty or on leave or on
holidays with wages in either case in accordance with the terms of the contract of
employment and which are paid or payable in cash to him, but does not include-
(i) The cash value of any food concession.
(ii) Any dearness allowance, house rent allowance, overtime allowance, bonus
commission or any other similar allowance payable to the employee in respect of
his employment or of work done in such employment.
(ii) Any presents made by the employer.
Question 15
Manorama Group of Industries sold its textile unit to Giant Group of Industries.
Manorama Group contributed 25% of total contribution in Pension Scheme, which was
due before sale under the provisions of Employees Provident Fund and Miscellaneous
Provisions Act, 1952. The transferee company (Giant Group of industries) refused to
hear the remaining 75% contribution in the Pension Scheme. Decide, in the light of the
Employees Provident Fund and Miscellaneous Provisions Act, 1952, who will be liable to
pay for the remaining contribution in case of transfer of establishment and upto what
extent? (November 2004)
Answer
The problem as asked in the question is based on the provisions of section 17(B) of the
Employees Provident Funds and Miscellaneous Provisions Act, 1952. Accordingly where
an employer in relation to an establishment, transfers that establishment in whole or in
part by sale, gift, lease or licence or in any other manner whatsoever, the employer
and the person to whom the establishment is so transferred shall be jointly or severally
liable to pay the contribution and other sums due from the employer under the
provisions of this Act of the scheme or pension scheme, as the case may be, in respect
of the period upto the date of such transfer. It is provided that the liability of the
transferee shall be limited to the value of the assets obtained by him by such transfer.
It would be thus evident from the aforesaid provisions that 17-B deals with the liability
of transferor and transferee in regard to the money due under (a) the Act or (b) the
scheme (c) and pension scheme. In the case of the transfer of the establishment
brought in by sale, gift, lease etc. The liability of the transferor and transferee is joint
and several, but it is limited to the period upto the date of transfer.
Therefore applying the above provisions in the given case the transferor Manorama
Group of industries, the transferor has paid only 25% of the total liability as

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contribution in pension scheme before sale of the establishment. With regards to
remaining 75% liability both the transferor and transferee companies are jointly and
severally liable to contribute. In case, the transferor refuses to contribute, the
transferee will be liable,
The liability is limited upto the date of transfer and upto remaining amount. Further,
the liability of the transferee i.e. Giant Group of Industries, is limited to the extent of
assets obtained by it from the transfer of the establishment.’
Question 16
State the emoluments paid to employees, which do not come within the purview of
“basic wages” under the Employees’ Provident Funds and Miscellaneous Provisions Act,
1952.
(May 2005)
Answer
According to Section 2(b) of the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952 ‘Basic wages’ means all emoluments which are earned by an
employee while on duty or on leave in accordance with the terms of contract of
employment which are paid or payable in cash to him but does not include:
(i) Cash value of any food concession.
(ii) Any dearness allowance i.e., Payments paid to an employee on account of rise in
cost of living, house rent allowance, bonus, commission or over some allowance
and
Any presents made by the employer.

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Question 17
State the powers of the Central Government to authorize certain employers to maintain
provident fund accounts under the Employees Provident Funds and Miscellaneous
Provisions Act, 1952. (May 2005)
Answer
Powers of the Central Government to authorize certain employers to maintain
Provident Fund Accounts under the Employees’ Provident Funds and Misc.
Provisions Act, 1952 (Section 16A):
Under Section 16A of the Employees Provident Fund and Miscellaneous Provisions Act,
1952, the Central Government may, on an application made to it in this behalf by the
employer and majority of employees in relation to an establishment employing 100 or
more persons, authorize the employer, by an order in writing, to maintain a provident
fund account in relation to the establishment subject to such terms and conditions as
may be specified in the scheme.
The Central Government shall, however, not make such authorization if the employer of
such establishment had committed any default in the payment of provident fund
contribution or had committed any other offence under the Act during the three years
immediately preceding the date of such authorization.
When an establishment is authorized to maintain a provident fund account, the
employer in relation to such establishment shall maintain such account, submit such
return, deposit the contribution in such manner, provide for such facilities for
inspection, pay such administrative charges and abide by such other terms and
conditions, as may be specified in the scheme.
Any authorization so made by the Central Government may be cancelled by an order in
writing if the employer fails to comply with any of the terms and conditions of the
authorization or where he commits an offence under any of the provisions of the Act.
Before canceling the authorization, the Central Government shall give the employer a
reasonable opportunity of being heard.
Question 18
State the establishments to which the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952, applies. (November 2005)
Answer
Establishments under the EPF & MP Act, 1952: According to Section 13(1) of the
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 applies to the
following establishments:
(a) every establishment which is a factory engaged in any industry specified in
schedule 1 and in which 20 or more persons are employed; and
(b) any other establishment which employs 20 or more persons or class of such
establishments which the Central Government may, by notification in Official
Gazette specify in the behalf.
However, the Central Government may, after giving not less than 2 months notice of its
intention to do so, apply the provisions of this Act to any establishment with less than
20 persons in the employment.

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Further, notwithstanding anything mentioned above or in sub-section (1) of Section 16,
where it appears to the Central Provident Fund Commissioner, whether on an
application made to him in this behalf or otherwise, that the employer and the majority
of employees in relation to any establishment, have agreed that the provisions of this
Act should be made applicable to the establishment, he may, by notification in the
official, Gazette, apply the provision of this Act to the establishment on and from the
date of such agreement or from any subsequent date specified in such agreement.
An establishment to which this Act applies must continue to be governed by this Act,
even if the number of persons employed therein falls at any time below 20.
Question 19
Explain the manner in which the “Executive Committee” under the provisions of the
employees’ Provident Fund and Miscellaneous Provisions Act, 1952 is constituted. State
its composition.
(November 2005)
Answer
Executive Committee under EPF & MP Act, 1952 – (Section 5A): The Central
Government may, by notification in the official Gazette, constitute, with effect from
such date as may be specified therein, on Executive Committee to assist the Central
Board in the performance of its functions.
The Executive Committee shall consist of the following persons as members, namely:
(a) A chairman appointed by the Central Government from amongst the members of
the Central Board;
(b) Two persons appointed by the Central Government from amongst the persons
referred to in clause (b) of sub-section (1) of Section 5A.
(c) Three persons appointed by the Central Government from amongst the persons
referred to in clause (c) of sub-section (1) of Section 5A.
(d) Three persons representing the employers elected by the Central Board from
amongst the persons referred to in clause (d) of sub-section (i) of Section 5A.
(e) Three persons representing the employees elected by the Central Board from
amongst the persons referred to in clause (e) of sub-section (i) of Section 5A.
(f) The Central Provident Fund Commissioner, ex-officio.
The terms and conditions subject to which a member of the Central Board may be
appointed or elected to the Executive Committee and the time, place and procedure of
the meetings of the Executive Committee shall be such as may be provided for in the
scheme.
Question 20
Explain the Law relating to extent of contribution by an employee to his Provident Fund
under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. Can the
employee increase the amount of contribution? (May
2006)
Answer

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Contribution to Provident Fund: Section 6 of the Employees Provident Fund
and Miscellaneous Provisions Act, 1952 states that the employee contribution to
the fund shall be 10% of the basic wage, dearness allowance and retaining
allowance (if any). An employee can at his will contribute beyond 10% if the
scheme makes provision therefore subject to the conditions that the employer
shall not be under an obligation to pay any contribution over and above his
contribution payable under this Section. This rule will prevail irrespective
whether the employer employs the person directly or through contractor.
According to the first proviso to the said section the Central government may,
however, raise the aforesaid percentage of contribution from 10% to 12% in
respect of any establishments. It may do so after making such enquiries as it
deems According to the second proviso if the amount of any contribution
involves fraction of a rupee, the scheme may provide for rounding off such
fraction to the nearest rupee, half of a rupee or a quarter of rupee.
It may be noted that the dearness allowance mentioned above shall be deemed
to include also the cash value of any food concession, allowed to the employees;
also that “retaining allowance” means an allowance payable for the time being
to an employee of any factory or other establishment during any period in which
the, establishment is not working for retaining his service.
Question 21
Explain the salient features of the “Employees Pension Scheme” as provided under the
Employees Provident Fund and Miscellaneous Provisions Act, 1952. (May
2006)
Answer
Employees’ Pension Scheme: The scheme called the Employees’ Pension Scheme in
accordance with the provisions of Section 6A of the Employees’ Provident Fund and
Miscellaneous Provisions Act, 1952 provides for:
(a) Superannuation pension, retiring pension or permanent total disablement pension
to the employees of any establishment or class of establishments to which the Act
applies; and
(b) Widow or widower’s pension, children pension or orphan pension payable to the
beneficiaries of such employees.
The Act further provides that notwithstanding anything contained in Section 6 of the
Act, there shall be established, as soon as may be after framing of the Pension Scheme,
a Pension Fund into which there shall be paid, from time to time, in respect of every
employee who is a member of the pension scheme:
(a) Such sums from the employers’ contribution under Section 6 not exceeding 8 1/3%
of the basic wages, dearness allowance and retaining allowance, if any, of the
concerned employees, as may be specified in the pension scheme;
(b) Such sums as are payable by the employers of exempted establishments under
sub-section (6) of Section 17.
(c) The net assets of the Employees’ Family Pension Fund as on the date of the
establishment of the Pension Fund;

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(d) Such sums as the Central Government may, after due appropriation by Parliament
by law in this behalf, specify.
Further, the pension scheme may provide for all or any of the matters specified in
Schedule III.
Question 22
Explain the provisions of the Employees Provident Fund and Miscellaneous Provisions
Act, 1952 relating to the liability of an employer in case of transfer of the establishment
to another person.
(November 2006)
Answer
According to Section 17B of the Employee’s Provident Fund and Miscellaneous
Provisions Act 1952, where an employer in relation to an establishment, transfer that
establishment in whole or in part by sale, gift, lease or licence or in any other manner
whatsoever, the employer and the person to whom the establishment is so transferred
shall jointly or severely be liable to pay the contribution and other sum due from the
employer under any provision of this Act of the Scheme or the pension scheme, as the
case may be, in respect of the period up to the date of such transfer. The liabilities of
the transferee shall be limited to the value of the assets obtained by him by such
transfer. The liability of transferor and transferee in relating to all the money due
under the Act or the Scheme or pension scheme in case of the transfer of the
establishment.
Question 23
Explain the provisions of the Employees Provident fund and Miscellaneous Provisions
Act, 1952 relating to the following and state:
(i) Whether the balance to the credit of Provident Fund Account of an employee is
attachable by the decree of a Court ?
(ii) Whether the payment of contribution to provident fund of an employee, to be made
by his employer, who has become insolvent, a preferential payment
(November 2006)
Answer
(i) According to Section 10 of Employee’s Provident Fund and Miscellaneous Provisions
Act 1952, the amount standing to the credit of any member in the fund or credit of
any exempted employee in provident fund shall not in any way capable or, being
assigned or charged and shall not be liable to attachment under any decree or
order of any court in respect of any debt or liability incurred by the member on the
exempted employee.
The amount standing to the credit of the aforesaid categories of persons at the
time of their death and payable to their nominees under the scheme or the rules
vests in nominees. And the amount shall be free from any debt or other liability
incurred by the deceased or the nominee before the death of the member or the
exempted employee and shall also not be liable to attachment under any decree or
order of any court.
(ii) According to Section 11 of the Employee’s Provident Fund and Miscellaneous
Provisions Act 1952, if the employer is adjudged as insolvent or if the employer is a

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company and an order winding thereof has been made, the amount due from the
employer whether in respect of the employee’s contribution or employer’s
contribution must be included among the debts which are to be paid in priority to
all other debts in the distribution of the property of the insolvent or the assets of
the company. In other words, this payment will be a preferential payment provided
the liability thereof has accrued before this order of adjudication or winding up is
made.
Question 24
While an employee may increase his contribution to Provident Fund, is an employer also
liable to proportionately increase his contribution to the above under the Employees
Provident Funds and Miscellaneous Provisions Act, 1952 ? Explain. (May 2007)
Answer
Section 6 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952
provides that an employee can at his will contribute beyond 10% if the scheme makes
provision therefor subject to the condition that the employer shall not be under an
obligation to pay any contribution over and above his contribution payable under this
section.
Question 25
Explain the meaning of the term ‘Basic Wages’ under the Employees’ Provident Funds
and Miscellaneous Provisions Act, 1952. (May 2007)
Answer
“Basic wages” means all emoluments which are earned by an employee while on duty
or on leave or on holidays with wages in either case in accordance with the terms of
the contract of employment and which are paid or payable in cash to him, but does not
include:
(i) the cash value of any food concessions;
(ii) any dearness allowance (that is to say all cash payment, by whatever name
called, paid to an employee on account of rise in the cost of living), house rent
allowance, overtime allowance, bonus, commission or pay and other similar
allowance payable to the employee in respect of his employment or of work done in
such employment; or
(iii) any presents made by the employer. (Section 2(b), EPF & MP Act, 1952.
Question 26
Is the payment of provident fund contribution a preferential payment in case of the
employer being insolvent under the Employees Provident Funds and Miscellaneous
Provisions Act, 1952? (November 2007)
Answer
Section 11 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952
provides that if the employer is adjudged an insolvent or if the employer is a company
and an order for winding up thereof has been made, the amount due from the employer
whether in respect of the employee's contribution or the employer's contribution must
be included among the debts which are to be paid in priority to all other debts under
Section 49 of the Presidency -Towns Insolvency Act, Section 61 of the Provincial
Insolvency Act, Section 530 of the Companies Act, 1956, in the distribution of the
property of the insolvent or the assets of the company. In other words, this payment

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will be preferential payment provided the liability therefor has accrued before this
order of adjudication or winding up is made.
Question 27
Explain the salient features of the 'Employee's Deposits Linked Insurance Scheme' as
provided under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952.
(November 2007)
Answer
The Central Government under the Employees' Provident Funds and Miscellaneous
Provisions Act, 1952 framed the Employees' Deposit-linked Insurance Scheme, 1976.
The Insurance Scheme came into force on the 1st day of August, 1976.
Soon after the framing of the above scheme, there was established a Deposit-linked
Insurance Fund (called Insurance Fund). The employer shall pay into the fund from time
to time in respect of his employees an amount not exceeding 1 % of the aggregate of
the basic wages, dearness allowance and retaining allowance (if any) as the Centre
Government may, by notification in the Official Gazette, specify. He shall also pay into
the fund such further sum of money not exceeding 1/4th of the contribution which he is
required to make as the Central Government may, from time to time determine. This
payment is required to be made to meet all the expenses in connection with the
administration of the Employees' Deposit-linked Insurance Scheme other than the
expenses towards the cost of any benefit provided by or under that scheme [Section 6C
(4) (a)].
The Insurance Fund shall vest in the Central Board and be administered by it in such
manner as may be specified in the Insurance Scheme [Section 6C (5)]. The Insurance
Scheme may provide for all or any of the matters specified in Schedule IV [Section 6C
(7)].
The Insurance Scheme may provide that any of its provisions and amendment shall
take effect either prospectively or retrospectively on such date as may be specified in
this behalf in that Scheme [(Section 6C and 7)].
The Provident Fund claims complete in all respects submitted along with the requisite
documents shall be settled and the benefit amount paid to the beneficiaries within 30
days from the date of its receipt by the Commissioner. If there is any deficiency in the
claim, the same shall be recorded in writing and communicated to the applicant within
30 days from the date of receipt of such application. In case the Commissioner fails
without sufficient cause to settle a claim complete in all respects within 30 days, the
Commissioner shall be liable for the delay beyond the said period and penal interest at
the rate of 12% per annum may be charged on the benefit amount and the same may
be deducted from the salary of the commissioner.
Question 28
Explain the provisions of the Employees’ Provident Fund and Miscellaneous Provisions
Act, 1952 regarding the following:
(i) rate of interest on amount due from the employer under the Act.
(ii) maximum limit of interest rate
(iii) the period for which the employer is liable to pay the said interest.(May 2008)
Answer
Rate, limit and period of payment of interest

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As per Section 7Q of the Employees Provident Fund and Miscellaneous Provisions Act,
1952
(i) the employer shall be liable to pay simple interest at the rate of 12 per cent per
annum or at such higher rate as may be specified in the Scheme on any amount due
from him under this Act.
(ii) although limit of interest rate is not given in the Act, but it is clearly given the
higher rate of interest specified in the Scheme cannot exceed the lending rate of
interest of any scheduled bank.
(iii) the period for which the employer is liable to pay the interest is from the date
which the amount has become so due till the date of its actual payment.
Question 29
Vimal is an employee in a Company. The following payments were made to him during
the previous year:
(i) Piece rate wages
(ii) Productivity bonus
(iii) Additional dearness allowance
(iv) Value of Puja gift.

Examine as to which of the above payments form part of “Basic Wage”’ of Vimal under the
Employees Provident Fund and Miscellaneous Provisions Act, 1952.(May 2008)
Answer
Basic Wages
As per Section 2 of the Employees Provident Fund and Miscellaneous Provision Act,
1952, the “Basic Wages” means all emoluments which are earned by an employee
while on duty or on leave or on holidays with wages in either case in accordance with
the terms of the contract of employment and which are paid or payable in cash to him,
but does not include:
(i) the cash value of any food concessions;
(ii) any dearness allowance (that is to say all cash payments, by whatever name called,
paid to an employee on account of rise in the cost of living), house rent allowance,
overtime allowance, bonus, commission or pay and other similar allowance payable
to the employee in respect of his employment or of work done in such employment;
or
(iii) any presents made by the employer.
Applying the above provisions of the Act to the given problem, the Basic wages of X will
include only piece rate wages but it excludes the Productivity bonus, additional
dearness allowance and value of puja gift.
Question 30
What kind of entities fall within the purview of the Employees’ Provident Fund and
Miscellaneous Provision Act ,1952 ? (November 2008)
Answer
Entities within the purview of the Act

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The Act applies to the following entities subject to the exceptions contained in Sec.16:
(a) Every establishment which is a factory engaged in any industry specified in
schedule I and in which twenty or more persons are employed and
(b) Any other establishment which employs twenty or more persons or class of such
establishments which the central government may by notification in Official Gazette
specify in this behalf.
Question 31
Who is to constitute the Central Board of Trustees? How many persons shall be there in
the Central Board? Answer the questions with reference to the Employees Provident Fund
and Miscellaneous Provisions Act, 1952. (November 2008)
Answer
Constitution of the Central Board of Trustees
According to Section 5A the Central Government may constitute a Board of Trustees,
i.e. the Central Board. It consists of the following persons, as members, namely:
(a) A chairman and a vice – chairman to be appointed by the Central Government;
(aa) The Central Provident Fund Commissioner, ex–officio;
(b) Not more than fifteen persons appointed by the Central Government from amongst
its Officials:
(c) Not more than fifteen persons, representing Governments of such State as the
Central Government may specify
(d) Ten persons representing employers of the establishments to which the scheme
organizations of employers as may be recognized by the Central Government in
this behalf; and
(e) Ten persons representing employees in the establishment to which the scheme
organizations of employees as may be recognized by the Central Government in this
behalf.

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8
∗
THE COMPANIES ACT, 1956
Question 1
A public company proposes to purchase its own shares. State the source of funds that
can be utilised by the company for purchasing its own shares and the requirements to
be complied with by the company under the Companies Act before and after the shares
are so purchased.
(May 2000, Nov. 2004)
Answer
Sources of funds for buy-back of shares: A company can purchase its own shares
or other specified securities. The purchase should be out of:
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of any shares or other specified securities.
However, buy-back of any kind of shares or other specified securities cannot be made
out of the proceeds an earlier issue of the same kind of shares or same kind of other
specified securities [Section 77A(l)].
‘Specified securities’ includes employees’ stock option or other securities as may be
notified by the Central Government from lime to time. [Explanation (a) under Section
77A],
Requirements to be complied with before buy-back: The company shall not
purchase its own shares or other specified securities unless:
(a) the buy-back is authorised by its articles;
(b) a special resolution (also Declaration of Solvency to be filed with ROC & SEBI in
case shares are listed on any recognised stock exchange), authorising the buy-back
is passed in general meeting of the company;
(c) the buy-back is or less than 25% of the total paid-up capital and free reserves of
the company;
Provided that the buy-back of equity shares in any financial year shall not exceed
25% of its total paid up equity capital in that financial year.
(d) the ratio of the debt owed by the company is not more than twice the capital and
free reserves after such buy-back;

Updated as per the Companies (Second Amendment) Act, 2002.

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Provided that the Central Government may prescribe a higher ratio of the debt than
that specified under this clause for a class or classes of companies. The expression
‘debt’ includes all amounts of unsecured and secured debts,
The expression “free reserves” shall have the same meaning assigned to it in
Clause (b), Explanation to Section 372A, which means those reserves which, as per
latest audited balance-sheet of the company are free for distribution as dividend
and shall include balance to the credit of the securities premium account but shall
not include share application money.
(e) all the shares or other specified securities for buy-back arc fully paid-up;
(f) the buy-back of the shares or other specified securities listed on any recognised
stock exchange is in accordance with the regulations made by SEBI in this behalf;
(g) the buy-back in respect of shares or other specified securities other than those
specified in Clause (f) is in accordance with guidelines as may be prescribed.
[Sections 77A(2) and 77A(6)].
The notice of the meeting at which special resolution is proposed to be passed shall be
accompanied by an explanatory statement slating;
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of security intended to be purchased under the buy- back;
(d) the amount to be involved under the buy-back; and
(e) the time limit for completion of buy-back. [Section 77A(3)].
Requirements to be complied with after buy-back: These are dealt with in
Sections 77A and 77AA of the Companies Act, 1956 [as amended by the Companies
(Amendment) Act, 1999] and narrated below:
(1) The securities bought back should be extinguished and physically destroyed within
7 days utter completion of buy-back [Section 77A(7)].
(2) After completion of buy-back, a company cannot issue same kind of shares or
security (which was bought back) for a period of 24 months. Allotment of rights
issue renounced by members is also not permissible in this period. However,
following are permitted:
(i) issue of security of a different class that is other than one which was bought
back,
(ii) bonus issue,
(iii) subsisting obligations such as conversion of warrants,
(iv) stock option to employees
(v) sweat equity
(vi) conversion of preference shares or debentures into equity shares [Section
77A(8)].
(3) The company should maintain a register showing securities bought back and con-
sideration paid for the buy-back, date of cancellation of securities, date of
extinguishment and physical dytruction of securities other prescribed particulars
[Section 77A(9)].

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(4) After completion of buy-back, a return has to be filed with the Registrar of Com-
panies and Securities and Exchange Board of India if the company is listed within
30 days giving details as prescribed [Section 77A(10)].
(5) If the buy-back is from free reserves, a sum equal to the nominal value of shares
purchased will be transferred to capital redemption reserve account. Details of such
transfer will be disclosed in the balance sheet of the company (Section 77A).
Question 2
How far can a minor become a member of a company under the Companies Act, 1956?
(May, 2000)
Answer
The Company Law Board has laid down in Nandita Jain v. Bennet Coleman & Co. Ltd.
that a minor can become a member provided four conditions are fulfilled:
(a) Company must be a Co. Ltd. by shares.
(b) Shares are fully paid up.
(c) Application for transfer is made on behalf of minor by lawful guardian.
(d) The transfer is manifestly for the benefit of the minor.
This was also confirmed in S.L. Bagree v. Britannia Industries.
In also Diwan Singh v. Minerva Films Ltd. [(3958) 28 Comp. Cases 191 (Punj.), (1959)
29 Comp. Cases 263 (Punj.)], the Punjab High Court held that there is no legal bar to
minor becoming a member of a company by acquiring shares (by way of transfer)
provided the shares are fully paid and no further obligation or liability is attached to
them.
Minor can become member by transfer or transmission, but a company may not allow a
minor to be a member by allotment.
Question 3
Explain the meaning and significance of the ‘Pari Passu’ clause in a debenture. State
the particulars to be filed with the Registrar of Companies in case of such debentures
secured by a charge on certain assets of the company. (May, 2000)
Answer
‘Pari Passu’: Pari passu clause in a debenture means that all the debentures of the
series are to be paid rateably, if, therefore, security is insufficient to satisfy the whole
debts secured by the series of debentures, the amounts of debentures will abate
proportionately. If the clause is not made a use of then the debentures rank in
accordance with the date of issue, and if they are all issued on the same date they will
be payable according to their numerical order. A company, however, cannot issue a
new series of debentures so as to rank ‘puri passu’ with prior series unless the power to
do so is expressly reserved and contained in the debenture deed of the previous series.
Registration: In the event of the ‘puri passu’ clause being included in the debentures
secured by a charge, it is enough if the following particulars are filed with the Registrar
of Companies within 30 days after the execution of the deed containing the charges or
where there is no deed after the, execution of debentures of the series:

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(i) the total amount secured by the whole scries;
(ii) the dates of the resolutions authorising the issue of the series;
(iii) the date of deed, if any, by which security is created;
(iv) a general description of the property charged; and
(v) the name of the trustees for debenture holders, if any, together with the deed
containing the charge or a certified copy of the deed or, if there is no deed, one of
the debentures of the series (Section 128).
Where more than one issue is made of debentures in the series, particulars of the date
and the amount of each issue must be filed with the Registrar. But an omission to do so
will not affect the validity of ‘the. debentures issued.
Question 4
‘A company is a person separate from its members Explain. Examine the circumstances
under which the Courts may disregard the Company’s Corporate Personality.
(November, 2000)
Answer
COMPANY IS A PERSON SEPARATE FROM ITS MEMBERS: A company in the eyes of
law is regarded as an entity separate from its members, it has an independent
corporate existence. Any of its members can enter into contracts with the company in
the same manner as any other individual can and he cannot be held liable for the acts
of the company even if he holds virtually the entire share capital. The company’s
money and property belong to the company, and not to the shareholders, (Salomon v.
Salomon & Co. Ltd.).
Further, from the juristic point of view, a company is a legal person distinct from its
members (Salomon v. Salomon & Co.). It has its own corporate personality. This
principle may be referred to as ‘the veil of incorporation’. The Courts in general
consider themselves bound by this principle. The effect of this principle is that there is
a Fictional veil between the company and its members. That is, the company has a
corporate personality which is distinct from its members.
The human ingenuity, however, started using this veil of corporate personality blatantly
as a cloak for fraud or improper conduct- Thus, it became necessary for the Courts to
break through or lift the corporate veil or crack the shell of corporate personality or
disregard the corporate personality of the company. Thus while by fiction of law a
corporation is a distinct entity, yet, in reality it is an association of persons who are in
fact the beneficial owners of all the corporate property (Gallaghar v. Germania Brewing
Co.).
The circumstances or the cases in which the Courts have disregarded the corporate
personality of the company are:
1. Protection of revenue: The Courts may ignore the corporate entity of a company
where it is used for tax evasion. (Juggilal v. Commissioner of Income-tax).
2. Prevention of fraud or improper conduct: The legal personality of a company may
also be disregarded in the interest of Justice where the machinery of incorporation
has been used for some fraudulent purpose like defrauding creditors or defeating or
circumventing law. Thus where a company was incorporated as a device to conceal

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the identity of the perpetrator of the fraud, the Court disregarded the corporate
personality. (Jones v. Lipman).
3. Determination of character of a company whether if is enemy: A company may
assume an enemy character when persons in de facto control of its affairs are
residents in an enemy country. In such a case, the court may examine the
character of persons in real control of the company and declare the company to be
an enemy company. (Daimler Co. Ltd. V. Continental Tyre &. Rubber Co. Lid).
4. Where the company is a sham: The Courts also lift the veil or disregard the
corporate personality of a company where a company is a mere cloak or sham
[hoax]. (Gilford Motor Co. Lid. V. Horne).
5. Company avoiding legal obligations: Where the use of an incorporated company is
being made to avoid legal obligations, the Court may disregard the legal
personality of the company and proceed on the assumption as if no company
existed.
6. Company acting as agent or trustee of the shareholders: Where the Company is
acting as agent for its shareholders, the shareholders will be liable for the acts of
the company. (F.G. Films Ltd. In re.).
7. Avoidance of welfare legislation: Where the Courts find that there is avoidance of
welfare legislation, it will be free to lift the corporate veil. [Workmen of Associated
Rubber Industry Ltd. V. Associated Rubber Industry Ltd.].
8. Protecting Public Policy: The Courts invariably lift the corporate veil or disregard the
corporate personality of a company to protect the public policy and prevent
transactions contrary to public policy, (Connors v. Connors Ltd.).
Question 5
Define a Private Company. Explain the procedure for conversion of a Public Company
into a Private Company. (November 2000)
Answer
Definition of a Private Company: According to Section 3(1) (iii) of the Companies
Act, 1956 a 'private company' means a company which has a minimum paid-up capital
of one lakh rupees or such higher paid-up capital as may be prescribed and by its
articles:
(a) restricts the right to transfer its shares if any.
(b) limits the number of its members to 50 not including its employee members
(present or past) [Joint holders of shares are treated as a single member].
(c) prohibits any invitation to the public to subscribe for any shares, or debentures of
the company.
(d) prohibits any invitation or acceptance of deposits from persons other than its
members, directors or their relations.
Procedure for conversion of a Public Company into a Private Company: A
private limited company, if it desires to convert itself into a public company will have to
follow the under-mentioned procedure:

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(1) It should take the necessary decision in its board meeting and fix up the; time,
place and agenda for convening a general meeting to alter the articles of
association and consequently the name by a special resolution as well as to alter by
special resolution the "object clause" of the memorandum subject to the
confirmation of the Company Law Board (Now Central Government) under Section
17 and by ordinary resolution the share capital clause under Section 94 if the
alteration of share capital is involved in the process.
(2) The company has to see that any change in the articles confirms to the provisions
of the Companies Act [Section 31(1)]; also to see that such change does not
increase the liability of any member who had become the member before the
alteration.
(3) It must issue notices for the general meeting in order to pass there at the special
resolutions together with the explanatory statements for the alteration of the
articles and the memorandum.
(4) It will have to convene the general meeting in order to pass there at the special
resolution (i) for the purpose of the alteration of the memorandum and article of
association; and (ii) also for the purpose of deleting those articles which are
required to be included in the articles of a private company only [Section 3(i)(iii)].
Such other articles which do not apply to a public company should be deleted and
those which apply should be inserted. Consequent upon the above changes, it will
have to delete the word "private" from its name [Section 21].
(5) It shall file either the prospectus in the Form prescribed under Schedule II or the
statement in lieu of prospectus in the form prescribed under Schedule IV within 30
days of the passing of the resolution mentioned in (4) above in the manner stated
in Section 44.
The-aforesaid prospectus or the statement in lieu of the prospectus must be in
confirmity with Parts I and II of Schedule IV respectively.
(6) In the matter of the prospectus or the statement in lieu of the prospectus the
company has to adopt abundant caution against any untrue statement being
included therein, because inclusion of untrue statement will attract penalty by
virtue of Section 44(4). It may be noted that a statement included in a prospectus
or statement in lieu of prospectus shall be deemed to be untrue if it is misleading in
the form and context in which it is included. Likewise, where the omission from
prospectus or a statement in lieu of prospectus of any matter is calculated to
mislead, it shall be deemed, in respect of such omission, to be a prospectus or a
statement in lieu of prospectus in which an untrue statement is included.
(7) It shall file with the concerned stock exchange 6 copies of such amendments on
both articles and memorandum, one of which must be a certified copy.
(8) It shall file with the Registrar the said special resolution together with the
explanatory statement within 30 days of their passing [Section 192].
(9) It must take some of the steps regarding further issue of capital under Section 81
which are not in common with the steps discussed in relating to further issue of
shares.
(10) The company has to apply to the Registrar for the issue of a fresh certificate of
incorporation for the changed name, namely, the existing name with the word
"private" deleted. On issue of such certificate shall be name of the converted
company be final and complete [Section 23].

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Question 6
What do you understand by the term 'Charge'? State the list of charges which are
required to be filed for Registration with the Registrar of Companies.(November 2000)
Answer
The word "Charge" has not been adequately defined in the Companies Act, 1956.
Section 124 of the Companies Act, 1956 provides that the expression "charge" shall
include a mortgage. The meaning of the term, is not clearly explained here too.
However, it can be understood that where in a transaction for value, both parties
evidence the intention that -property existing or future shall be made available as
security for the payment of a debt and that the creditor/mortgage shall have a present
right to have it made available, there is a charge.
The conditions of borrowing as they normally do, confer charge on the company's
assets (movables as well as immovables). It is thus important to those who are dealing
with the company to know how much of its assets are subjected to charges which
encumber company's property(ies) without actually delivering possession thereof to be
filed and registered on the file of the company at the office of the registry i.e. the
Registrar of the Companies concerned.
List of charges to be registered:

1. a charge to secure any issue of debentures.
2. a charge on an uncalled share capital of the company.
3. a charge on an immovable property, wherever situated or any interest therein.
4. a charge on book-debts of the company.
5. a charge, not being a pledge on any movable property of the company.
6. a charge on calls made but not paid.
7. a charge on goodwill on a patent or a copyright.
8. a floating charge on the undertaking or any property of the company including
stock-in-trade.
9. A charge on a share or every share in ship.
Question 7
When can a Public Company offer the new shares (further issue of shares) to persons
other than the existing shareholders of the Company? Can these shares be offered to
the Preference Shareholders? (November, 2000)
Answer
Issue of Further Shares: Section 81 of the Companies Act, 1956 provides that if, at
any time after the expiry of 2 years from the formation of the company or after the
expiry of one year from the first allotment of shares, whichever is earlier, it is proposed
to increase the subscribed capital by allotment of further shares, it should be offered to
the existing equity shareholders of the company in proportion to the capital paid up on
those shares.
The new shares of a company may-be offered to outsiders or any persons (including
the equity shareholders) if-

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(a) a special resolution to that effect is passed by the company.
(b) an ordinary resolution is passed and the approval of the Central Government is
obtained. The Central Government will accord its approval if it is satisfied that the
proposal is most beneficial to the company.
(c) if any shareholder to whom the shares are offered declines to accept the shares. In
such a case the Board of Directors may dispose of the shares in such a manner as
they think most beneficial to the company.
(d) if the new shares are issued within 2 years from the formation of the company or 1
year of the allotment made for the first time.
Preference Shareholders - whether (Further Issue of Capital) be offered to:
From the wordings of Section 81, it is quite clear that these shares can be issued only
to equity shareholders, unless procedure as stated above has been adopted for issue of
these shares to outsiders, etc. Therefore, in general these shares can not be offered to
preference Shareholders.
Question 8
Explain the circumstances in which a company can alter its ‘Objects’ as slated in the
Memorandum of Association. What procedure shall such a company follow to give
effect to the alteration ? (May, 2001)
Answer
Under the provisions of Section 17 of the Companies Act, 1956 a company may alter its
objects by passing special resolution in the following circumstances :
1. when the company wants to carry in business more economically or more
efficiently.
2. when the company wants attain its main purpose by new or improved means.
3. when the company wants enlarge or change the local area of its operations.
4. when the company wants to carry on some business, which may conveniently or
advantageously be combined with the objects specified in the Memorandum.
5. when the company wants to restrict or abandon any of the objects specified in the
memorandum.
6. when the company wants to sell or dispose of the whole or any part of the
undertaking.
7. when the company wants to amalgamate with any other company or body of
person.
Procedure :
1. Special Resolution to be passed at a general meeting to alter the objects of the
company.
2. Copy of special resolution to be filed with the Register of Companies within one
month from the date of the resolution with a printed copy of the Memorandum as
altered.
3. Certification of registration: The Registrar shall register the special resolution and
certify the registration under his hand within one month from the date of the filing
of the special resolution. Such certificate shall be conclusive evidence that all the

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requirements with respect to alteration have been complied with and memorandum
so altered shall be the memorandum of the company.
If the documents required to be filed with the Registrar under Section 18 are not filed
within the prescribed time, the alteration shall at the expiry of such period, become
void and inoperative. (Section 19)
Question 9
With reference to the provisions of the Companies Act, 1956 explain the circumstances
under which a subsidiary company can become a member of its holding company-
Examine the position of the following with regard to membership in a company :
(i) An Insolvent
(ii) Partnership Firm. (May 2001)
Answer
In accordance with the provisions of Section 42 of the Companies Act, 1956, a
subsidiary company cannot become a member in its holding company and any
allotment or transfer of ‘ shares in a company to its subsidiary is void. The section
however does not apply where:
(a) the subsidiary company is a legal representative of a deceased member of the
holding company, or
(b) the subsidiary company is a trustee and the holding company or a subsidiary
thereof is not beneficially interested under the trust, or
(c) allotment or transfer of shares is by way of security for the purpose of a transaction
entered into by the holding company in the ordinary course of business which
includes the lending of money.
Position of the following with regard to membership in a company:
1. Partnership Firm: A partnership may firm hold shares in a company in the individual
names of partners as joint shareholders. As an un incorporated association, a firm
is not a person and as such it cannot be entered as a member in the register of
members. (Ganesh Das Ram Gopal v. R.G. Cotton Mills Ltd.) Section 25 of the
Companies Act however, permits a firm to be a member of a company licensed
under Section 25.
2. An Insolvent: An insolvent may be a member of a company. So long as his name
appears in the register of members, he is a member and is entitled to vote even
though his shares vest in the Official Assignee or Receiver. (Morgan v. Gray)
Question 10
Explain the following with reference to transfer of shares in a company registered
under the Companies Act 1956:
(i) Blank Transfers
(ii) Forged Transfers. (May 2001)
Answer
(i) Blank Transfers : A blank transfer is an instrument of transfer signed by the
transferor in which the name of the transferee and the date of the transfer are not
filled. The ownership of the shares in a company is generally transferred from one

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person to another by the execution of a document by the seller and the buyer. This
document is variously described as a “transfer instrument” or “transfer deed” or
simply “transfer”. But in a blank transfer, the seller fills in his name and signs it.
Neither the buyers’ name nor his signature and the dale of sale is filicd in the
transfer. This practice enables the buyer to -sell it again and the subsequent buyer
also can sell these shares again by the same transfer deed. This process can be
used for a number of times. For such ultimate transfer and registration the first
seller will be treated as the transferor.
(ii) Forged Transfers: A Forged transfer is a nullity. It does not give the transferee
concerned any title to the shares. If the company acts on a forged transfer and
removes the name of the real owner from the Register of Members, then it is bound
to restore the name of the real owner on the register as the holder of the shares
and to pay him dividends which he ought to have received.
A buyer of shares on the basis of forged transfer does not get any title to the
shares, since forgery is nullity. However, the company shall be liable to compensate
the purchaser in so far as the company had issued a certificate to transfer and was
therefore estopped from denying the liability accruing from it own acts.
Question 11
In what way does the Companies Act, 1956 regulate and restrict the/allowing in respect
of a company going/or public issue of shares :
(i) Mmimum Subscription: and
(ii) Application Money payable on shares being issued ? Explain. (May
2001)
Answer
Companies Act, 1956 by virtue of provisions as contained in Section 69 (1) and Section
69 (3) to (6) regulate and restrict the minimum subscription and the application money
payable on shares being issued by a company going for public issue of shares. These
sections provide asunder:
Minimum subscription [Section 69 (1)]
No Allotment shall be made of any share capital of a company offered to the public for
subscription; unless; -
(a) the amount stated in the prospectus as the minimum amount has been Subscribed,
provided that such amount shall not be less than 5% of the nominal amount of the
shares being issued; and
(b) the sum payable on application for such amount has been paid to and received by
the company-
If the application are not received by the company for such quantum of shares for
making the minium subscription, within 120 days after the issue of prospectus, all
money received from the applicants for share shall be repaid without interest. If any
such money is not repaid within 130 days after the issue of prospectus, moneys will be
repaid with interest at the rate of 6% from the expiry of 130 days.
Application money:

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Section 69 (3) provides that the amount payable on application on each share shall not
be less than 5% of the nominal amount of the share. All moneys received from
application for shares shall be deposited and kept deposited in a Schedule Bank:
(a) until the certificate to commence business is obtained under Section 149, or
(b) where such certificate has already been obtained, until the entire amount payable
on application for shares in respect of the minimum subscription has been received
by the company, and where such amount has not been received by the company
within the time on the expiry of which the moneys received from the applicant for
shares are required to be repaid without interest under Sub-section (5), all moneys
received from applications for shares shall be returned in accordance-with the.
provisions of that sub-section, as stated above.
Question 12
ABC Limited realised on 2nd May, 2001 that particulars of charge created on 12th
March, 2001 in favour of a Bank were not field with the Register of Companies for
Registration, What procedure should the Company follow to get the charge registered
with the Registrar of Companies? Would the procedure he different if the charge was
created on 12lh February, 2001 instead of 12th March, 2001? Explain with reference to
the relevant provisions of the Companies Act, 1956. (May 2001)
Answer
Registration of charge : The prescribed particulars of the charge together with the
instrument, if any by which the charge is created or evidenced, or a copy thereof shall
be filed with the Registrar within 30 days after the date of the creation of charge.
[Section 125 (1)]. In this case particulars of charge have not been filed within the
prescribed period of 30 days.
However, the Registrar is empowered under proviso to section 125 (1) to extend the
period of 30 days by another 30 days on payment of such additional fee not exceeding
10 times the amount of fee specified on Schedule X as the Registrar may determine.
Taking advantage of this provision, ABC Ltd., should immediately file the particulars of
charge with the Registrar and satisfy the Registrar that it had sufficient cause, for not
filing the particulars of charge within 30 days of creation of charge.
If the charge was created on 12 th Feb., 2001, then the company has to apply to the
Company Law Board (Now tribunal) under Section 341 and seek extension of time for
riling the particulars for registration. The company must satisfy the Company Law
Board (Now tribunal) (a) that the omission was accidental or due to inadvertence or
due to some other sufficient cause or was not of the nature to prejudice the position of
creditors or shareholders of the company, or that it is just and equitable to grant relief
on the other grounds. On such satisfaction, the Company Law Board (Now tribunal) may
extend the term for the registration of charge or; such terms and conditions as it may
think expedient. Once the time is extended and it is made out that the particulars have
been field within the extended time, the registrar is bound to register the charge.
Question 13
Explain clearly the meaning of the term ‘Underwriting’ and ‘Underwriting’ Commission’.
In what way, does the Companies Act, 1956 regulate payment of such Commission ?
Explain.
(May 2001)

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Answer
‘Underwriting’ is a contract entered into between the company and certain parties
(called underwriters) before the shares or debentures are offered to the public for
subscription. The contract is that in case the whole or an agreed portion of the shares
or debentures are not applied for, then the underwriters will themselves apply for
subscribed shares or debentures; alternatively, they will procure persons to apply for
them. The company is least concerned with how the underwriters procure the
purchasers. Thus, the underwriters expose themselves to a great risk in ‘placing’ the
shares before the public. And in return for this exposure to the risk the underwriters get
commission. The commission is payable on the amount of shares underwritten. It will
be payable even if the underwriters are not ultimately called upon to take up any
shares.
Conditions to be satisfied:
Payment of underwriting commission is regulated by the provisions of Companies Act,
1956 stating certain conditions as contained in Section 76. The conditions to be fulfilled
are :
(i) the payment of commission should be authorised by the articles.
(ii) the names and addresses of the underwriters and the number of shares or
debentures underwritten by each of them should be disclosed in the prospectus.
(iii) the amount of commission should not exceed, in the case of shares, 5% of the price
at which the shares have been issued or the amount or rate authorised by the
articles whichever is less, and in the case of debentures it should not exceed 2-1/2
%.
(iv) the rate should be disclosed in the prospectus, or in the statement in lieu of
prospectus (or in a statement in prescribed form signed in the like manner as the
statement in the lieu of prospectus) and should be filed with the Registrar along
with a copy of the underwriting contract before the payment of the commission.
(v) the number of shares or debentures which persons have agreed to subscribe
absolutely or conditionally for commission, should be disclosed in the manner
aforesaid.
(vi) a copy of the contract for the payment of the commission should be delivered to
the Registrar along with the prospectus or the statement in lieu of prospectus for
registration.
Section 76 (4A) clarifies that commission to the underwriters is payable only in respect
of those shares or debentures which are offered to the public for subscription. However
where, (i) a person, who for a commission has subscribed (or agreed to subscribe) for
shares or debentures of a company and before the issue of the prospectus (or
statement in lieu of prospectus) for such shares or debentures, some other person (or
persons) has subscribed for any or all of them, and (ii) such a fact together with the
aggregate amount of commission payable to the underwriter is disclosed in such
prospectus (or statement in lieu of prospectus), then the company may pay
commission to the underwriter in the respect of his subscription irrespective of the fact
that the shares or debentures have already been subscribed.
Question 14

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Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of
companies registered under the Companies Act, 1956. Explain the circumstances in
which an outsider dealing with the company cannot claim any relief on the ground of
‘Indoor Managent’
(November 2001)
Answer
Doctrine of indoor Management & Exceptions:
One limitation to the doctrine of constructive notice of the memorandum and articles of
a company is the doctrine of indoor management. According to the doctrine of indoor
management, the outsider, dealing with the company are entitled to assume that as far
as She internal proceedings of the company arc concerned, everything has been
regularly done. They are bound to rend the registered documents and to see that the
proposed dealing is not inconsistent therewith, but they are not bound to do more, they
need not inquire into the regularity of the internal proceedings as required by the
memorandum and Articles. This limitation of the doctrine of constructive notice is
known as the ‘Doctrine of Indoor Management’, popularly known as rule in Rovul British
Bank v. Turquand. Thus the doctrine of indoor management aims to protect outsiders
against the company.
Exceptions:
In the following circumstances an outsider dealing with the company cannot claim any
relief on the ground of ‘indoor Management’
1. Knowledge of irregularly: Where a person dealing with a company has actual or
constructive notice of the irregularity as regards internal management: he cannot
claim the benefit under the rule of indoor management. (T.R. PRATT (Bombay) Ltd.
v. E.D. Sassoon & Co. Ltd.).
2. Negligence: Where a person dealing with a company could discover the irregularity
if he had made proper inquiries, he cannot claim the benefit of the rule of indoor
management. The protection of the rule is also not available where the
circumstances surrounding the contract- are so suspicious as to invite inquiry, and
the outsider dealing with the company does not make proper inquiry (Anand Bihari
Lel v. Dinshaw & Co.) Also the case of Under Wood v. Bank of Liver Pool.
3. Act void ab initio and forgery: Where the acts done in the name of a company are
void ab initio, the doctrine of indoor management does not apply. The doctrine
applies only to irregularities that otherwise might affect a genuine transaction. It
does not apply to a forgery. A Company can never he held liable for forgeries
committed by its officers. (Ruben v. Great Fingall Consolidated Co.).
4. Acts outside the scope of appartent authority : If an officer of a company enters
into a contract with a third party and if the act of the officer is beyond the scope of
his authority, the company is not bound. (Kreditbank Cassel v. Schenkers Ltd.).
5. A person having no knowledge of Articles cannot seek protection under Indoor
Management.
Question 15
State the remedies available against a company to a subscriber fur allotment of shares
on she faith of a misleading prospectus. What conditions must be satisfied by such a
subscriber before opting for the remedies? (November 2001)

CA-IPCC
Answer
A person who has been induced to subscribe for shares/debentures on the faith of
misleading prospectus has the following remedies against the company. If there is a
misstatement of a material information in a prospectus, and if it has induced any
shareholder to purchase shares, he can:
1. rescind the contract, and
2. claim damages from the company whether the statement is fraudulent or an
innocent one. .
RESCISION OF THE CONTRACT
Any person who takes shares on the faith of statements of fact contained in a
prospectus, can apply to the Court for the rescission of the contract if those statements
are false or fraudulent or if some material information has been withheld. He must,
however, apply for the rescission within a reasonable time and before the company
goes into liquidation. But he will have to surrender to the company the shares allotted
to him, His name is then removed from the register of members and he gets back the
money paid by him to the company along with interest. The contract can be rescinded
if the following conditions are satisfied:
1. the statement must be a material misrepresentation of facts.
2. the statement must have induced the shareholder to take the shares,
3. the statement must be untrue.
4. the deceived shareholder is an allottee and he must have relied on the statement in
the prospectus.
5. the omission of material fact must be misleading before rescission is granted.
6. the proceedings for rescission must be started as soon as the allottee comes to
know of a misleading statement in the prospectus on the faith of which he had
subscribed for shares and before the company goes into liquidation.
Rescision is available only if the aggrieved shareholder:
(a) acts within reasonable time;
(b) before the company goes into liquidation;
(c) has not done any act indicating the upholding of the contract to take shares like:
(1) having attended a meeting of the company or
(2) accepted dividends declared by the company.
DAMAGES:
Any person induced by a fraudulent statement in a prospectus to take shares is entitled
to sue the company for damages. He must prove the same matters in claiming
damages for deceit as in claiming rescission of the contract. He cannot both retain the
shares and get damages against the company. He must show that he has repudiated
the shares and has not acted as a shareholder after discovering the fraud or
misrepresentation.
Question 16
XYZ Co. Ltd. was in the process of incorporation. Promoters of the company signed an
agreement for the purchase of certain furniture for the company and payment was to

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be made to the suppliers of furniture by the company after incorporation. The company
was incorporated and the furniture was used by it. Shortly after incorporation, the
company went into liquidation and the debt could not he paid by the company for the
purchase of above furniture. As a result suppliers sued the promoters of the company
for the recovery of money.
Examine whether promoters can he held liable for payment under the following
situations:
(i) When the company has already adopted the contract after incorporation?’
(ii) When the company makes a fresh contract with the suppliers in terms of
preincorporation contract?
(November 2001)
Answer
The promoters remain personally liable on a contract made on behalf of a company
which is not yet in existence. Such a contract is deemed to have been entered into
personally by the promoters and they are liable to pay damagers for failure to perform
the promises made in the company’s name (Scot v. Lord Ebury), even though the
contract expressly provided that only the company shall be answerable for
performance.
In Kelner v. Baxter also it was held that the persons signing the contracts viz.
Promoters were personally liable for the contract.
Further, a company cannot ratify a contract entered into by the promoters on its behalf
before its incorporation. Therefore, it cannot by adoption or ratification obtain the
benefit of the contract purported to have been made on its behalf before it came into
existence as ratification by the company when formed is legally impossible. The
doctrine of ratification applies only if an agent contracts for a principal who is in
existence and who is competent to contract at the time of contract by the agent.
The company can, if it desires, enter into a new contract, after its incorporation with
the other party. The contract may be on the same basis and terms as given in the pre-
incorporation contract made by the promoters. The adoption of the pre-incorporation
contract by the company will not create a contract between the company and the other
parties even though the option of the contract is made as one of the objects of the
company in its Memorandum of Association. It is, therefore, safer for the promoters
acting on behalf of the company about to be formed to provide in the contract that: (a)
if the company makes a fresh contract in terms of the pre-incorporation contract, the
liability of the promoters shall come to an end; and (b) if the company does not make a
fresh contract within a limited time, either of the parties may rescind the contract.
Thus applying the above principles, the answers to the questions as asked in the paper
can be answered as under:
(i) the promoters in the first case will be liable to the suppliers of furniture. There was
no fresh contract entered into with the suppliers by the company. Therefore,
promoters continue to be held liable in this case for the reasons given above.
(ii) in the second case obviously the liability of promoters comes to an end provided
the fresh contract was entered into on the same terms as that of pre-incorporation
contract.
Question 17

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M Company Limited issued 2,00.000 equity shares of Rs 10 each. You are allotted 100
shares. Explain any ten rights you have as a member of the company. (November,
2001)
Answer
Rights of the member in a company:
A member of a company has the following rights against the company:
1. Right to have the certificate of shares held or the certificate of stock issued to him
within the prescribed time.
2. Right to have his name borne on the register of members.
3. Right to transfer shares subject to any restrictions imposed by the articles of the
company.
4. Right to attend meeting of shareholders, received proper notice and to vote at the
meetings.
5. Right to associate in the declaration of dividends and to apply to the Court for an
injunction restraining the directors from paying dividends on an ultra virus
declaration or out of capital.
6. Right to inspect the registers, indexes, returns and copies of a certificates etc. kept
by the company and to obtain extracts or copy thereof.
7. Right to obtain copies of Memorandum and Articles on request and on payment of
the prescribed fees.
8. Right to have the first option in case of issue of new shares or a further issue of
shares (i.e. right to pre-emption) by the company.
9. Right to receive a copy of the Statutory Report.
10. Right to apply to the court to have any variation or abrogation to his rights set
aside by the Court.
11. Right to have notice of any resolution requiring special notice.
12. Right to obtain on request minutes of proceedings at general meeting.
13. Right to remove directors by joining with others.
14. Right to obtain a copy of the profit and loss account and the balance sheet with
the auditor’s report.
15. Right to apply for the appointment of one or more competent inspectors by the
Government to investigate into the affairs of the company as well as for reporting
thereon.
16. Right to participate in the appointment of an auditor at the AGM.
17. Right to inspect the auditor’s report-at the AGM of the company.
18. Right to receive a share in the capital of the company and in the surplus assets, if
any, on the company’s liquidation.
19. Right to participate in passing of the special resolution what the company may be
wound up by the court or voluntarily.

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20. Right to participate in the appointment and in fixation of remuneration of one or
more liquidators in the case of a Member’s voluntary Winding-up and to fill any
vacancy in the office of a liquidators so appointed by him.
Question 18
Can a Public Limited Company reduce its Share Capital? If so, when and how? Also
state the procedure it has to follow for doing so. (November, 2001)
Answer
Reduction of Share Capital:
A company is allowed to reduce its share capital subject to special safeguards.
Section 100 of the Companies Act, 1956. provides that a company, limited by shares or
guarantee and having share capital, if so authorised by the articles, may by special
resolution and the confirmation of the Court, reduce its share capital in any way and in
particular by.
(a) extinguishing or reducing the liability of members in respect of the capital not paid
up;
(b) writing off or cancellation any paid-up capital which is in excess of the needs of the
company,
(c) paying off any paid-up share capital which is in excess of the needs of the
company.
Reduction in (b) and (c) may be made either in addition or without extinguishing or
reducing the liability of the member for uncalled capital.
Reduction of share capital may in reality take three forms, viz..
1. Reducing the value of shares in order to absorb the accumulated losses suffered by
the company without any payment to the shareholders.
2. Extinction of liability of capital not paid; and
3. Paying off any paid up share capital,
The interest of creditors is involved only in the cases stated in 2 and 3.
Procedure to be adopted
1. A special resolution is to be passed under Section 100.
2. An application is to be made under Section 101 to the Court for an order confirming
the reduction.
3. After the petition for Court’s confirmation is filed, the Court must settle the list of
creditors who are entitled to object such as creditors having a debt or a claim
admissible on a winding up.
4. The Court must ascertain the names of those creditors and the nature and amount
of their debts or claims.
5. The Court may publish notices fixing a day or days within which the creditors not
entered on the list are to claim to be so entered or are to be excluded from the
right of objecting to the reduction.
6. The Court has power to dispense with the consent of the dissenting creditor, on the
company securing the paying of the debt or claim by appropriating the full amount
of the amount fixed by the Court.

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However, the Court has discretionary power having regard to any special
circumstances of the case to direct that the provisions of Section 101(2) shall not apply
as regards any classes of creditors. The special circumstances should be convincing to
the Court.
After being satisfied the Court may make an order confirming the reduction on such
terms and conditions as it thinks fit. The company then has to put the words “and
reduced” to the name of the company.
Question 19
What conditions as required under the Companies Act, 1956 must be satisfied by a
company for the forfeiture of shares of a member, who has defaulted the payment of
calls? What are the consequences of such forfeiture?(November, 2001)
Answer
FORFEITURE OF SHARES AND THE CONSEQUENCES
CONDITIONS TO BE SATISFIED FOR FORFEITURE:
1. In accordance with the Articles: Forfeiture-must be authorized by the Articles of the
company and must be for the benefit of the company.
2. Notice prior to forfeiture: Before shares can be forfeited, the company must serve a
notice on the defaulting shareholder requiring payment of unpaid call together with
any interest which may have accrued. (Article 29:Table A).
3. Give not less than 14 days time from the date of service of notice for the payment
of the amount due;
4. State that in the event of non-payment of the amount due within the period
mentioned in the notice, the shares in respect of which the call was made will be
liable to be forfeited, (article 30. Table A). The notice of forfeiture must also specify
the exact amount due from the shareholder. If the notice is defective in any
respect, the forfeiture will be invalid.
5. Resolution of the Board: If a defaulting shareholder does not pay the amount within
the specified time as required by the notice, the directors must pass a resolution
forfeiting the shares. (Article 31). If tins resolution is not passed, the forfeiture is
invalid. If, however, the notice threatening the forfeiture incorporates the resolution
of forfeiture as well, e.g., when it states that in the event of default the shares shall
be deemed to have been forfeited, no further resolution is necessary.
6. Good faith: The power to forfeit shares must be exercised by the directors in good
faith and for the benefit of the company.
EFFECT OF FORFEITURE:
1. Cessation of membership: A person whose shares have been forfeited ceases to be
a member in respect of the shares so forfeited. He, however, remains liable to pay
to the company all moneys which, at the date of forfeiture were payable by him to
the company in respect of the shares.
2. Cessation of liability: The liability of the person whose shares have been forfeited
ceases if and when the company receives payment in full of all such money in
respect of the shares,
3. If a company is wound up more than 1 year after the. forfeiture, The member
whose shares have been forfeited cannot be held liable as a contributory.

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4. Forfeited shares become the property of the company and may be reissued or
otherwise disposed of on such terms and in such manner as the Board thinks fit.
The purchaser would be liable to pay all the calls due on the shares including the
call for which shares were forfeited. But where the articles provide that a
shareholder whose shares have been forfeited is to remain liable for the call
occasioning the forfeiture, the purchaser is liable only for the difference between
the amount of the call and the sum realized on reissue, should this be less than the
call.
Question 20
What is a Debenture Certificate? When and within what time it should be issued’ Is
there any penalty for the delay or default in the issue of such certificate? (November,
2001)
Answer
Meaning of Debenture Certificate:
Debenture Certificate is an acknowledgement by a company that the certificate holder
is a creditor of the company to the extern of the number of debentures multiplied by
the face value of each debenture. Thus, if the certificate states 100 debentures of Rs.
100/- each, then the person having the certificate is entitled to get R.s.10,000/- from
the company at the time of the redemption of such debentures by the company.
Thus this certificate entitled the holder to get repayment of principal sum at the
appointed date and the payment of interest at a fixed rate. This certificate is issued by
the company to the Debenture Holders of the company. The debentures are issued
under the common seal of the company.
Debenture certificate is to be issued within three months of the allotment of
debentures or debenture stock and within two months after the application for
registration of the transfer of any such debentures or debenture stock, deliver the
certificates of all debentures and debenture stock allotted or transferred in accordance
with the procedure laid down in Section 53 of the Companies Act, 1956.
The C.L.B. (Now Central Government) is empowered to extend the period within which
the debenture certificate may he delivered to a further period not exceeding nine
months, if it is satisfied that it is not possible for the company to deliver the certificates
within the said period,
Penalty: Where the default is made in the delivery of debenture certificate within the
specified time, every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to two years and he company and every
officer of the company who is in default shall be punishable with the fine which may
extend to Rs.5000 per day of default.
If a company on which a notice has been served requiring ii to make good the default
fails to do so within 10 days of the service of the notice, the CLB (Central Government)
may on an application made by the aggrieved person, make an order directing the
company and any officer of the company to deliver the securities within the period
mentioned in the order. The order may provide that all costs incidental to the
application shall be borne by the company or by the officer of the company responsible
for the default.
Question 21
Explain fully the doctrine of Ultra Vires and state its implications.(November, 2001)

CA-IPCC
Answer
The objects or the acts which a Company is empowered to do are specified in the
Memorandum of Association of the company and’ the company cannot cross the
boundary drawn by the Memorandum of Association. The company is empowered to do
only such acts which are:
(a) within the framework of the Memorandum i.e. stated in clear terms in the
Memorandum of Association of the company, or
(b) which are reasonably and fairly incidental to the attainment of its objects, or
(c) which are otherwise authorised by the Companies Act. If the company does any
acts which are not covered under the three categories, such ads shall be beyond
the power of the company and shall be declared ultra vires the Memorandum of the
Company.
The term ultra virus means beyond powers. A company binds itself to work within the
frame work of those objects as stated in its Memorandum of Association and if it does
any act beyond the scope of its objects clause, then act or acts is declared as ultra
virus. These ultra vires acts may be categorized under the following three heads:
(a) Acts ultra virus the directors, i.e. acts beyond the powers of the Directors of the
company. Such are not altogether void and inoperative. They can be ratified by the
shareholders in a general meeting.
(b) Acts ultra vires the Articles of Association of the company, i.e. the ads which are
beyond the powers of the company given to it by its Articles of Association. These
acts are also not altogether void and inoperative. They can also be ratified by the
company, by altering the articles through a special Resolution.
(c) Acts ultra vires the Memorandum of Association of the company, i.e. acts which are
beyond the powers of the company given to it by its Memorandum of Association.
As a matter of fact such acts are beyond the legal powers of the company and
therefore, known as “ultra vires the company “. These Acts are wholly void and
inoperative; they cannot be ratified since they are beyond the legal powers, of the
company. The company, therefore, is not bound by such acts at all. Most important
thing is, that such acts cannot be ratified even by the whole body of the
shareholders of the company.
The decisions given in the following leading cases, have proved the point in question,
that ultra vires acts of the company are void and inoperative wholly. The cases are:
(1) Ashbury Railway Carriage and Iron Co. Ltd. V. Riche (I875)
(2) Re German Date Coffee Co. (1882)
(3) Egyptian Salt Co. v. Port said Salt Association (1931)
Implications of ultra vires Acts:
Their implications can be stated asunder:
(1) Infliction against the Company: Any member of the company can obtain injunction
from the court i.e. an order from the court to restrain the company from proceeding
with the ultra vires acts-
(2) Personal liability of the Directors: The directors of the company are personally liable
to the company for the ultra vires acts. It is the duty of the directors to see that the
company’s capital is used for the legitimate objects of the company and not
otherwise. However, if the person receiving the money knows that he is receiving

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payment for an ultra vires act, then he is bound to return the money back to the
director.
(3) Personal liability of the directors to third parties: Directors action is treated to be an
action of an agent who acts beyond his authority and, therefore, .the directors for
ultra vires act(s) shall be held personally liable towards the third party for any loss
suffered by such third parties.
(4) Ultra vires contracts are void: This is because of the fact, that the Company is not
empowered to enter into such contracts, as well such contracts cannot become
inter vires by subsequent ratification even by the shareholders of the company.
A contract of a company which is ultra vires the company is void ab initio and of no
legal effect. Neither the company nor other contracting party can enforce the ultra
vires contract. The company may, however, after the objects clause for the future, but
such alteration will not validate the past ultra vires acts done.
Question 22
A company refuses to register transfer of shares made by X to Y. The company does
not even send a notice of refusal to X or Y within the prescribed period. Has the
aggrieved party any right(s) against the company for such a refusal?.Advise. (May,
2002)
Answer
The problem as asked in the question is based upon Section 111 of the Companies Act
dealing with the refusal to register transfer and appeal against refusal.
On refusal to register a transfer or transmission by operation of law, of the right to any
shares in, or debentures thereof, the company has to send notice of refusal giving
reasons to the transferee or the transferor or to the person giving intimation of such
transmission, or on delivery of transfer deed to the company, as the case may be
within a period of 2 months from the date of the intimation or delivery of the transfer
deed to the company. In the given case the company has failed to give such notice of
refusal to the aggrieved parties within the stipulated time of 2 months. Failure to give
notice of refusal gives a right/remedies to the aggrieved parties.
Rights/remedies to aggrieved parties:
The aggrieved parties may apply to the Company Law Board (Tribunal) under sub-
section (2) or (4) of Section 111 against refusal or for rectification of the register of
members, if his name is entered in the register without sufficient cause, or for omission
of his name from the register or default in making an entry of his name in the register.
The time of filing such appeal is 4 months from the date of lodgement of transfer
application. There is no limitation period provided for making an application for
rectification of register of members, under subsection (4). The company is also
punishable under sub-section (12) with a fine upto Rs.500 per day.
Question 23
When is an Allotment of Shares treated as an irregular allotment? State the effects of
an irregular allotment. (May, 2002)
Answer
Irregular allotment:

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Allotment of shares is irregular when it has been made by a company in violation of
Section 69 or 70. Thus:
1. where the company has issued a prospectus, the allotment is irregular if it; (i) has
not been able to raise the amount of minimum subscription, (ii) has not collected
application money (which shall not be less than 5% of the nominal amount of the
shares); and (iii) has not kept the money so received in a Scheduled Bank.
2. where the company has not issued a prospectus, the allotment is irregular if it does
not file with the Registrar for registration, a statement in lieu of prospectus at least
3 days before ‘the first allotment of shares.
Inspite of these stringent provisions, sometimes on allotment is made by the directors
in utter disregard of the provisions, such an allotment is treated by the Act not as void
ab initio but as irregular.
Effects of irregular allotment:
Allotment is voidable at the option of the allotee: The option must be exercised
by the allotee: (a) within 2 months after holding of the statutory meeting of the
company, or (b) where the company is not required to hold a statutory meeting, or
where the allotment is made after the holding of statutory meeting, within 2 months
after the date of allotment.
Notice of avoidance given within this time will be sufficient, though actual legal
proceedings if necessary, may be commenced thereafter. Such an allotment is
avoidable even if the company is in the course of winding up (Re National-Motor Mail
Coach Co. Ltd. 1908 Ch. 228).
It is not necessary that the allottee should commence actual legal proceedings within 2
months. It is enough for him to give a notice to the company of his intention to revoke
the allotment.
Compensation: Any director, who has knowledge of the fact of the irregular allotment
of shares, shall be liable to compensate the company and the shareholder respectively
for any loss, damages or costs which the company or the allotee may have sustained or
incurred there by Proceedings to recover any such loss, damages or costs can be only
be commenced within 2 years from the date of the allotment.
Question 24
Can a non-profit organization be registered as a company under the Companies Act? If
so, what procedure does it have to adopt? (May, 2002)
Answer
Procedure/or Registration of a non-profit organisation as a company: An association of
persons set up for promoting commerce, arts, science, religion, charity or any other
useful , object and intends to apply its profits or other income in promotion of its
objects can be registered as a Company under the Companies Act. However, it has to
prohibit payment of any dividend to its members.
Procedure: The association has to apply to the Central Government for issuing a
licence. Through this licence the Central Government shall direct the Registrar to
register the association as a company with limited liability without the addition of
words ‘limited’ or ‘private limited’ to its name. Therefore, the association may be
registered accordingly.

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The association has to fulfill the conditions needed for registration as a company, i.e. it
must have its name, its Memorandum of Association, its Articles of Association or
Rules/Bye-laws and signatures or its founder members with two witnesses. On
registration (subject to the provisos of Section 25) it will have the same privileges and
obligations as a limited company has. This licence is revocable by the Central
Government, and on revocation the Registrar shall put the words ‘Limited’ or ‘Private
Limited’ against the company’s name in the Register. But before such revocation, the
Central Government must give it a written notice of .its intention to revoke the licence
and opportunity to be heard in the matter.
Question 25
Explain the meaning of ‘Sweat Equity Shares’ and state the conditions a company has
to fulfil for issuing such shares. (May, 2000,2002 & Nov. 2003)
Answer
Mewing of Sweat Equity Shares: Sweat equity shares mean equity shares issued by thy
company to employees or directors at a discount or for consideration oilier than cash
for providing know-how or making available right in the nature of intellectual properly
rights or value additions, by whatever name called. [Explanation II to Section 79A,
Companies (Amendment) Act, 2000].
Conditions to be fulfilled before issue of Sweat Equity Shares:
Notwithstanding anything contained in Section 79 (Providing for issue of shares at a
discount), a company may issue sweat equity shares if the following conditions are
fulfilled:
1 Shares of a class which have already been issued only can be issued as 'sweat
equity shares'.
2. Issue of 'sweat equity-shares' should be authorised by a special resolution passed
by the company in general meeting.
3. The resolution should specify number of shares, current market price,
consideration, if any and class or classes of directors or employees to whom the
'sweat equity shares' may be issued.
4. The 'sweat equity shares' may be issued only one year after the company was
entitled to commence business.
5. If the company is listed on stock exchange 'sweat equity shares' can be issued as
per regulations made by SEBI. If the company is not listed on the stock exchange
'sweat equity shares' will be issued in accordance with guidelines of-Central
Government. (Section 79A(I)).
6. The 'sweat equity shares' have same limitations restrictions and rights as are
applicable to other equity shares. [Section 79A(2)].
Question 26
Explain the term 'Share Warrant'. How does it differ from 'Share Certificate'?
(May, 2002, 2003)
Answer
Meaning of Share Warrant: Share warrant is a document which a public company issues
in conformity with statutory requirements, under the common seal of the company and
slates that the holder of the warrant is entitled to certain number of shares specified

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therein. Share warrant is a bearer document and the title to the shares specified
therein can be transferred by mere delivery of the share warrant. To that extent, it is a
negotiable instrument.
Under Section 114 of the Companies Act, 1956 the issue of such shares wan-ant can be
made only if the company is so authorised by its articles and permission of the Central
Government has been obtained. (Table A contains regulations permitting issue of
shares warrants). Further, share warrants to bearer can be issued only in respect of
fully paid shares. Dividend coupons are attached to the share warrants providing for
the payment of future dividends on the shares specified in the warrants.
Distinction between a share warrant and a share certificate:
(i) All companies, whether public or private are required to issue share certificates.
Share warrant can be issued only by public companies.
(ii) A share warrant can be issued by a public company if it is empowered to do so by
its Articles of Association and has obtained prior approval of the Central
Government. There is statutory obligation on every company issuing shares to issue
a share certificate. No such power need be taken in the articles of Association, nor
is the approval of the Central Government required.
(iii) A share warrant can be issued only with respect of fully paid up shares, A share
certificate is to be issued even where the shares are partly paid-up.
(iv) The holder of a share certificate is a member of the company but the holder of a
share warrant is not a member unless the Articles otherwise provide.
(v) A share warrant is by mercantile usage a negotiable instrument. A share certificate
is not.
(vi) A share warrant can be transferred by mere delivery and no registration of transfer
with the company is required. The shares can be transferred by execution of a
transfer deed and its delivery along with the share certificate. The transfer is
complete when it is registered by the company,
(vii) No stamp duty is payable on transfer of a share warrant whereas stamps duly is
payable on transfer of shares specified in a share certificate.
(viii) Where a director is required to hold some qualification shares, a share warrant
docs not constitute such a qualification whereas a share certificate does.
(ix) A share certificate is a document showing prima facie title to the shares
represented thereby. A share warrant is the share security itself, transformed for
the purpose of negotiation into a different character.
(x) The holder of a share certificate can present a petition for winding up of the
company. The holder of a share warrant cannot do so.
(xi) Dividend is paid to the holder of a share certificate by the issue of a dividend
warrant in his favour. Dividend due on a share warrant is advertised in newspapers
and is payable to the holder of the dividend warrant on presentation of the relevant
coupon attached to the share warrant.
Question 27
Name any five charges which are required to be registered under the Companies Act.
1956. What is the effect of non-registration of a charge under Companies Act, 1956?
(May, 2002)

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Answer
In accordance with the provisions of the Companies Act 1956, as contained in Section
125, the following are the charges required to be registered with the Registrar of
companies within 30 days after the date of its creation:
(i) a charge for the purpose of recurring any issue of debentures;
(ii) a charge an uncalled share capital of the company;
(iii) a charge on any immovable property, wherever, situate, or any interest therein;
(iv) a charge on any book debt of the company.
(v) a charge, not being a pledge, on any movable property of the company;
(vi) a floating charge on the undertaking or any property of the company including
stock-in-trade;
(vii) a charge on calls made but not paid;
(viii) a charge on a ship or any share in ship;
(ix) a charge on goodwill, on a patent or licence under a patent, on a trademark or on a
copyright or a licence under a copyright.
Effect of non-registration:
If any of the charges is not registered; it shall be void against the liquidators and any
creditor of the company. [Section 125(1)].
(i) When the charge becomes void, the money secured thereby shall immediately
become payable. (Section 125(3)].
(ii) The company and every officer of the company may be subjected to a penalty upto
Rs. 5,000/- for every day during which the default continues.
In the event of the charge being void for non-registration no right of lien can be
claimed on the documents of title, as they are only ancillary to the charge and were
delivered pursuant to the charge. Though the charge becomes void for non-
registration, but the debt is good as a simple debt.
Question 28
Describe the ways to become a member of a company.
A company issued 20 partly paid equity shares and registered them in the name of the
minor describing him as minor. The father o the minor signed the application on the
minor’s behalf. After some time company went into liquidation. The company filed a
suit against father of the minor to recover the remaining amount on the shares.
Whether the company will succeed ? Advise. (Nov. 2002)
Answer
The membership of a company may be acquired in the following ways :
1. By subscribing to memorandum (Section 41): This section provides that the
subscribers of the memorandum of association shall be deemed to have agreed to
become the members of the company and on its registration shall be entered as
members in the register of members.
2. By allotment: A person may become a shareholder by agreeing to take shares in
the company by allotment.

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3. By transfer: Section 41 says that every subscribers to the memorandum of a
company and every other person who agrees in writing to become a member of the
company and whose name is entered in its register of members. Thus it requires
two thing a) an agreement in writing to become a member and b) an entry in the
register.
4. By transmission: Here a person may become a shareholder by transmission of
shares through death, lunacy or insolvency.
5. By estoppel: This arises when a person holds himself out as a member or knowingly
allows his name to remain on the register when he has actually parted with his
shares. In the event of winding up he will be liable like other genuine members as a
contributory (Hansraj A. Ashtana). However, he may escape liquidity by applying for
removal of his name under Section 155.
Answer to the problem :
Every person who is competent to contract may become a member. A minor and a
person of unsound mind, being incompetent to contract, cannot be members of the
company. It has been held in Mohri Bihi vs. Dharmadas Ghose (1930) that since a
minor has no contractual capacity, the agreement with the minor is void ah intio.
The Companies Act, 1956 prescribes no qualification for membership. Therefore, in
India, the minor may be allotted shares. His name may remain on a company’s register
of members, but during minority he incurs no liability. In the given problem the
company issued 20 partly pad shares and registered it in the minor’s name. The
transaction was void and the father who signed the application on the minor’s behalf
could not be treated as having contracted for the shares; as such he could not be
placed on the list of contributions when the company goes in liquidation. The facts of
this problem are related to Palaniappa B. Official Liquidator AIR 1942 Mod. 470).
Question 29
Whether a company can issue shares at premium?
State the purposes for which the Share Premium account can be used under the
provisions of the Companies Act, 1956. (Nov. 2002)
Answer
Issue of shares at premium (Section 78)
If the market exists, a company may issue its shares at premium i.e. the price higher
than their nominal value. There is no restriction contained in the Companies Act, 1956
on the sale of shares at a premium. But SEBI guidelines have to be observed as they
indicate when an issue has to be at par and when premium is chargeable. Premium
may be received in case or kind. Where the value of assets received by a company as a
consideration for allotment is greater than the nominal value of shares, it is in essence
an allotment at a premium. An amount equal to extra value of the assets would have
to be carried to the securities premium account. The amount to the credit of share
premium account has to be maintained with the same sanctity as share capital and can
be reduced only in the manner of share capital. The act does regulate the
disbursement of the amount collected as premium. Such account be used in the
following ways be the company.
(a) it may be applied to issue to the members as fully paid by way of bonus the
unissued shares of the company.

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(b) it may be used to write off preliminary expenses.
(c) it may be used to write off commission or discount account.
(d) it may be spent in providing for the premium payable on the redemption of
preference shares or debentures of the company.
Question 30
In what way does the Companies Act, 1956 regulate the holding of an Annual General
Meeting by a public limited company? Explain. (Nov. 2002)
Answer
Provision relating to – regulation of AGM under the Companies Act,
1956
Section 166 of the Companies Act, 1956 regulate the holding of an Annual General
Meeting by a public limited company. Accordingly, section provided that:
1. Every company shall in each year hold in addition to any other meeting a general
as its annual general meeting and shall specify the meeting as such in the notices
calling it; and not more than 15 months shall elapse between the date of one
annual AGM of a company and that of the next. A company may hold its first AGM
within a period of not more than 18 months from the date of its incorporation; and
if such general meeting is held within that period, it shall not be necessary for the
company to hold any AGM in the year of its incorporation or in the following year.
However, the Registrar may, for any special reason, extend the time within which
any AGM (not being the first AGM) shall be held, by a period not exceeding 3
months.
2. Every AGM shall be called for a time during business, on a day that is not a public
holiday, and shall be held either at the registered office of the company or at some
other place within the city, town or village in which the registered office of the
company is situate.
The Central Government may exempt any class of companies from the provisions of
this sub-section subject to such conditions as it may impose. Further, a public company
or a private company which is a subsidiary of a public company, may by its articles fix
the time for its AGM and may also by a resolution passed in one AGM fix the time for its
subsequent AGMs
Section 167 provides that:
(1) If default is made in holding an AGM in accordance with Section 166, the CLB may,
notwithstanding anything in the Act or in the articles of the company, on the
application of any member of the company, call, or direct the calling of, a general
meeting of the company and give such ancillary or consequential directions as the
CLB thinks expedient in relation to the calling, holding and conducting of the
meeting.
(2) A general meeting held in pursuance of sub-section (1) shall, subject to any
directions of the CLB, be deemed to be an AGM of the company.
Further Section 168 provides that if default is made in holding a meeting of the
company in accordance with Section 166, or in complying with any directions of the
Central Govt. under sub-section (1) of Section 167, the company, and every officer of
the company who is in default, shall be punishable with fine which may extend to Rs.

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50,000 and in the case of a continuing default, with a further fine which may extent to
Rs. 2,500 for every day after the first during which such default continues.
Question 31
Explain the limitations relating to alternation of Articles of Association of a company.
(Nov. 2002)
Answer
Limits on the Alteration of Articles:
Every company has a right to alter its articles. A company cannot divest itself of these
powers. Matters as to which the memorandum is silent can be dealt with by the
alteration of articles. Such alteration is effective by passing a special resolution. The
right to alter the article is subject to the following limitations:
(i) The alteration must not exceed the powers given by memorandum or conflict with
the provisions thereof.
(ii) It must not be inconsistent with any provisions of the Companies Act or any other
statute.
(iii) It must not be illegal.
(iv) It shall not be in fraud on minority or inflict a hardship on minority shareholders,
without any corresponding benefits to the company as a whole.
(v) It must not be inconsistent with any order of the court, under section 404 any
subsequent alteration thereof which is inconsistent with such an order can be made
by the company only with the leave of the court.
(vi) It may have retrospective effect so long as it does not affect the things already
done by the company (Allen B. Gold Reef of West Africa [1909] SC 732)
(vii) If a public company is converted into a private company, then the approval of
Central Government is necessary (Section 31(1)) In this regard an injunction cannot
be granted to prevent the adoption of new article which constituted a breach of
contract. But if the company acts on them it may be liable to damages [Shirlaw Vs
Southern Foundaries Ltd. 1940 AC 701 (760)].
(viii) An alteration should not increase the liability of a member unless he has agreed
thereto in writing (Section 38)
(ix) A reserve capital once created cannot be unreserved but may be cancelled on a
reduction of capital (Midland Railway Carriage Wagon Co. 1907) Section 99.
(x) Any irregular alteration which have been acted on for many years are binding.
Question 32
Explain clearly the meaning of Lifting the Corporate Veil, as applicable in case of
companies incorporated under the Companies Act, 1956. Under what circumstances
the veil of a company can be lifted by the court? (Nov. 2002)
Answer
Lifting of the corporate veil and the cases in which veil of a company
can be lifted:
A company in the eyes of law is regarded as an entity separate from its members. It
has an independent corporate existence. Any of its members can enter into contracts

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with the company in the same manner as any other individual can and he cannot be
held liable for the acts of the company even if he holds virtually the entire share
capital. The company’s money and property belong to the company, and not to the
shareholders. (Salomon v. Saloman & Co. Ltd.)
Further, from the juristic point of view, a company is a legal person distinct from its
members (Salomon v. Salomon & Co.). It has its own corporate personality. This
principle may be referred to as ‘the veil of incorporation’. The Courts in general
consider themselves bound by this principle. The effect of this principle is that there is
a fictional veil between the company and its members. That is, the company has a
corporate personality which is distinct from its members.
The human ingenuity, however, started using this veil of corporate personality blatantly
as a cloak for fraud or improper conduct. Thus it became necessary for the Courts to
break through or lift the corporate veil or crack the shell of corporate personality or
disregard the corporate personality of the company. Thus while by fiction of law a
corporation is a distinct entity, yet, in reality it is an association of persons who are in
fact the beneficial owners of all the corporate property (Callaghar v. Gerrnania Brewing
Co.)
The circumstances or the cases in which the Courts have disregard the corporate
personality of the company are:
2. Protection of revenue: The Courts may ignore the corporate entity of a company
where it is used for tax evasion. (Juggilal v. Commissioner of Income tax).
3. Prevention of fraud or improper conduct: The legal personality of a company may
also be disregarded in the interest of justice where the machinery of incorporation
has been used for some fraudulent purpose like defrauding creditors or defeating or
circumventing law. Professor Cower has rightly observed in this regard that the veil
of a corporate body will be lifted where the ‘corporate personality is being blatantly
used as a cloak for fraud or improper conduct’. Thus where a company was
incorporated as a device to conceal the identity of the perpetrator of the fraud, the
Court disregarded the corporate personality. (Jones v. Lipman).
4. Determination of character of a company whether it is enemy: A company may
assume an enemy character when persons in de facto control of its affairs are
residents in an enemy country. In such a case, the Court may examine the
character of persons in real control of the company and declare the company to be
an enemy company. (Daimler Co. Ltd. V. Continental Tyre & Rubber Co. Ltd.)
5. Where the company is a sham: The Courts also lift the veil or disregard the
corporate personality of a company where a company is a mere cloak or sham
(hoax). (Cilford Motor Co. Ltd. V. Horne).
6. Company avoiding legal obligations: Where the use of an incorporated company is
being made to avoid legal obligations, the Court may disregard the legal
personality of the company and proceed on the assumption as if no company
existed.
7. Company acting as agent or trustee of the shareholders: Where a company is
acting as agent for its shareholders, the shareholders will be liable for the acts of
the company. (F.C. Films Ltd., In re.)
8. Avoidance of welfare legislation: Where the Courts find that there is avoidance of
welfare legislation, it will be free to lift the corporate veil. (Workmen of Associated
Rubber Industry Ltd. V. Associated Rubber Industry Ltd.).

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9. Protecting public policy: The Courts invariably lift the corporate veil or disregard
the corporate personality of a company to protect the public policy and prevent
transactions contrary to public policy. (Connors v. Connors Ltd.).
Question 33
Who is an ‘Expert’? When an expert is not liable for the mis-statement in the
prospectus of a public company? (Nov. 2002)
Answer
The Experts consent to the issue of Prospectus :
A prospectus may contain a statement purporting to be made by an expert. The term
expert includes an engineer, a valuer, an accountant, and any other person whose
profession gives authority to a statement made by him [section 59 (2) of Companies
Act, 1956].
When an expert is not liable ?
An expert who would be liable by reason of having given his consent under section 58
to the issue of the prospects containing a statement made by him would not be liable if
he can prove.
(i) that having given his consent to the issue of prospectus, he withdrew it in writing
before the delivery of a copy of the prospectus for registration, or.
(ii) that after the delivery of a copy of the prospectus for resignation but before
allotment, he on becoming aware of the untrue statement withdrew his consent in
writing and gave reasonable public notice thereof and the reason therefore, or.
(iii) that he was competent to make the statement and he had reasonable ground to
believe and did up to the time of allotment of the shares or debentures believe,
that the statement was true. (Section 62 (3).
Question 34
ABC Company Limited at a general meeting of members of the company pass an
ordinary resolution to buy-back 30% of its Equity Share Capital. The articles of the
Company empower the company for buy-back of shares. The company further decide
that the payment for buy-back be made out of the proceed of the company’s’ earlier
issue of equity shares. Explaining the provisions of the Companies Act, 1956, and
stating the sources through which the buy-back of companies own shares be executed.
Examine.
(i) Whether company’s proposal is in order?
(ii) Would your answer be still the same in case the company instead of 30% decide to
buy-back only 20% of its Equity Share Capital? (Nov. 2002)
Answer
Buy Back of own Shares : Sources of Funds etc.
A company can purchase its own shares or other specified securities. The Purchase
should be out of:
(i) its free reserves; or
(ii) the securities premium account,. or

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(iii) the proceeds of any shares or other specified securities.
However, buy back of any kind of other specified securities cannot be made out of the
proceeds of an earlier issue of the same kind of shares or same kind of other specified
securities [Section 77A(i)].
‘Specified securities’ includes employees’ stock option or other securities as may be
notified by the Central Government from time to time (Explanation (a) section 77A).
In accordance with the provisions of the Companies Act, 1956, as contained in section
77A, the company deciding for buy back of shares must pass a special resolution in a
general meeting of its members authorizing the company for the buy back. Secondly,
the buy back is or less than 25% of the total paid-up capital and free reserves of the
company.
Taking into account these two provisions (conditions) itself, the questions as asked in
the problem can be answered as under:
1. The company’s proposal for buy-back is not in order as it has passed only an
ordinary resolution and the percentage of 30% buy-back is in violation of the
provisions
2. The answer to the second question shall also be the same since there also the
resolution passed by the company is an ordinary resolution and not special
resolution, though the percentage of buy-back, i.e. 20% is not violative.
Question 35
State the types of debentures which may be issued by a public company. (Nov. 2002)
Answer
Types of debentures:
Different types of debentures may be enumerated as follows :
(i) Naked or unsecured debentures : Such debentures do not carry any charge on the
assets of the company. The holders of these debentures do not have any security
as to repayment of principal or interest thereon.
(ii) Secured debentures : Such debentures are secured by a mortgage of the whole or
part of the assets of the company and known as mortgaged or secured debentures.
(iii) Redeemable debentures: Debentures that are redeemable at the expiry of a certain
period are known as redeemable debentures. Such redeemable debentures may be
reissued again under section 121 of the Companies Act, 1956.
(iv) Perpetual debentures: Where the debentures are redeemed on the happening of
specified events which may not happen for an indefinite period e.g. winding up,
they are known as perpetual debentures.
(v) Bearer Debentures : These Debentures are payable to a bearer and are transferred
by delivery and no stamp duty is payable on transfer. The Debenture holder is not
registered in the stock of the company but is entitled to claim interest and
repayment of principle. A bonafide transferee for value is not affected by the defect
in the title of the transfer.
(vi) Registered Debentures : The debentures are payable to registered holder. A
registered holder is one whose name appears on the debenture certificate/ letter of
allotment and is registered on the company’s register of debenture holders
maintained under section 152 of the Companies Act, 1956.

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Company may also issue convertible debentures which may be classified
as :
(a) Fully Convertible Debentures
(b) Non Convertible Debentures
(c) Partly Convertible Debentures
Convertible debentures may be converted into equity share capital .
Question 36
Define the term ‘Small Depositors’. State the legal provisions relating to acceptance,
repayment and further deposits of such small depositors under the Companies
Amendment Act, 2000. (Nov. 2002)
Answer
Definition of ‘Small Depositors’:
According to Section 58A of the Companies (Amendment) Act, 2000 a ‘small depositor’
means a depositor who has deposited in a financial year a sum not exceeding twenty
thousand rupees in a company and includes the successors, nominees and legal
representatives. It does not include those depositors who renew their deposits and
those depositors whose repayment is not made due to death or has been stayed by a
competent court.
Acceptance, repayment and further deposits :
1. Every company accepting deposit from the small depositor shall intimate to the
Company Law Board (now Tribunal) within fifty days, the name and address of
each small depositor to whom it had defaulted in repayment of deposit or interest
thereon. Thereafter the intimation shall be given on a monthly basis.
2. On receipt of the intimation, it shall direct the company to repay the deposit and for
this purpose an appropriate order is to passed within thirty days if it is delayed an
opportunity to the small depositor must be given of being heard, for this purpose
presence of the small depositor is not essential.
3. Restriction on the company:
(a) Unless the company repays all matured deposits along with interest due
thereon, it shall not accept further deposits form small depositors.
(b) If on any occasion, if company makes default in repayment of small deposits, it
shall state in all its future advertisement and application inviting deposits the
details regarding total number of small depositors and the amount due thereon.
(c) Where the interest accrued on small deposits has been waived, such fact must
be mentioned in every future advertisement and application for inviting
deposits.
(d) The application form inviting deposits must contain a statement that the
applicant had been appraised of every past default, waiver of interest, etc.
(e) If the company subsequent to acceptance of small deposits avails any working
capital from any bank, it shall first be utilized for repaying the principal and
interest due to small depositors before applying the funds for any other
purpose.

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(f) The penalty for failure to comply with the provisions of section 58AA or order of
Company Law Board (now, Tribunal) is subject to a fine of Rs. 500 per day and
imprisonment upto three years. The directors are also liable to be proceeded
against. Such offence shall be congnizable offence under the Criminal
Procedure Code. No court shall take cognizance of any offence under this
provision except on a complaint made by the Central Government or any officer
authorized by it in this behalf.
Question 37
‘A’ commits forgery and thereby obtains a certificate of transfer of shares from a
company and transfers the shares to ‘B’ for value acting in good faith. Company
refuses to transfer the shares to ‘B’. Whether the company can refuse? Decide the
liability of ‘A’ and of the company towards ‘B’ (Nov. 2002)
Answer
Problem relating to forged transfer:
A forged transfer is a nullity. It does not give the transferee concerned any title to the
shares. Since the forgery is an illegality therefore it cannot be a source of a valid
transfer of a title. Although the innocent purchaser acting in good faith could validly
and reasonably assume that the person named in the certificate as the owner of the
shares was really the owner of the shares represented by the certificate. Even then the
illegality cannot be converted into legality. Therefore, in this case company is right to
refuse to do the transfer of the shares in the name of the transferee B.
Here, as regards to the liability of A against ‘B’, A does not stand directly responsible
according to provisions of company law as he has already committed forgery which is
illegal but A is liable to compensate the company as he has lodged the forged transfer
and the company has suffered the loss.
As regards to the liability of the company towards B, the company shall be liable to
compensate to B in so far as the company had issued a certificate to transfer and was,
therefore, stopped from denying the liability accruing from its own act. Further, as the
company has refused to register him as a shareholder, company has to compensate B.
However, in this case the interest of the original shareholder will be protected.
Question 38
Briefly explain the doctrine of “Constructive Notice” under the Companies Act, 1956.
Are there any exceptions to the said doctrine? (May 2003)
Answer
Doctrine of Constructive Notice Etc.,
In consequences of the registration of the memorandum and articles of association of
the company with the Registrar of Companies, a person dealing with the company is
deemed to have constructive notice of their contents (T.R. Pratt (Bombay) Ltd. v. E.D.
Sassoon & Co. Ltd.). This is because these documents are construed as ‘public
documents’ under Section 610 of the Companies Act, 1956. Accordingly if a person
deals with a company in a manner incompatible with the provisions of the aforesaid
documents or enters into transaction which is ultra vires these documents, he must do
so at his peril.

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The doctrine of constructive notice is not a positive one but a negative one like that of
estopel of which it forms parts. It operates only against the person who has been
dealing with the company but not against the company itself; consequently he is
prevented from alleging that he did not know that the constitution of the company
rendered a particular act or a particular delegation of authority ultra vires.
There is one limitation to the doctrine of constructive notice of the Memorandum and
the Articles of a company. The outsiders dealing with the company are entitled to
assume that as far as the internal proceedings of the company are concerned,
everything has been regularly done. They are bound to read the registered documents
and to see that the proposed dealing is not inconsistent therewith, but they are not
bound to do more; they need not inquire into the regularity of the internal proceedings
as required by the Memorandum and the Articles. This limitation of the doctrine of
constructive notice is known as the ‘doctrine of indoor management’ or the rule in
Royal British Bank v. Turquand. Thus whereas the doctrine of constructive notice
protects the company against outsiders, the doctrine of indoor management seeks to
protect outsiders against the company.
Question 39
Explain the concept of “Shelf Prospectus” in the light of Companies (Amendment) Act,
2000. What is the law relating to issuing and filing of such prospectus? (May 2002,
2003)
Answer
Shelf Prospectus
According to Section 60-A as inserted by the Companies (Amendment) Act, 2000 ‘Shelf
Prospectus’ means a prospectus issued by any financial institution or bank for one or
more issues of the securities or class of securities specified in that prospectus.
Any public financial institution, a public sector bank or scheduled bank whose main
object is financing, shall file a shelf prospectus. ‘Financing means making loans to or
subscribing in the capital of, a private industrial enterprise engaged in infrastructural
financing, or such, other company as the Central Government may notify in this behalf.
A company filing a shelf prospectus with the Registrar shall not be required to file
prospectus afresh at every stage of offer of securities by it within a period of validity of
such shelf prospectus. It shall be required to file an information memorandum. On all
material facts relating to new charges created, changes in the financial position as
have occurred between the first officer of securities, previous offer of securities and the
succeeding offer of securities within the time prescribed by the Central Govt., prior to
making of a second or subsequent offer of securities under the shelf prospectus.
An information memorandum shall be issued to the public along with shelf prospectus
filed at the stage of the first offer of securities and such prospectus shall be valid for a
period of one year from the date of opening of the first issue securities under that
prospectus.
Where an update of information memorandum is filed every time an offer of securities
is made, such memorandum together with the shelf prospectus shall constitute the
prospectus.
Question 40

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Explain clearly the concept of “Perpetual Succession” and “Common Seal” in relation to
a company incorporated under the Companies Act, 1956. (May 2003)
Answer
Perpetual Succession and Common Seal
A company is a juristic person with a perpetual succession. It never dies, nor does its
life depend upon the life of its members. It is not in any manner affected by insolvency,
mental disorder or retirement of any of its members. It is created by a process of law
and can be put to an end only by the process of law. Members may come and go but
the company can go on forever (until dissolved). It continues to exist even if all its
human members are dead. Even during the war all the members of a private company,
while in general meeting, were killed by a bomb, the company. survived, not even a
hydrogen bomb could have destroyed it [K/9 Meat Supplies (GuiIdford Ltd, Re 0966) 3
All E.R. 320].
Perpetual succession, therefore means that a company’s existence persists irrespective
of the change in the composition of its membership. Thus its continued existence is not
affected by a constant change in its membership.
Common Seal:
Since a company has no physical existence, it must act through it agents and all such
contracts entered into by its agents must be under the seal of the company. The
common seal acts as the official signature of the company.
Question 41
What are the conditions and procedure whereunder shares may be forfeited under the
Companies Act, 1956? (May 2003)

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Answer
Procedure and Conditions for Effecting Forfeiture:
Shares can be forfeited if the following conditions are fulfilled:-
(1) Shares can be forfeited only if authorised by Articles of Association of the Company.
Ordinarily forfeiture of shares can take place only for the non-payment of calls due
to company and in such cases, calls must have been validly made. But articles may
provide other grounds for forfeiture. (Naresh Chandra Sanyal V. Calcutta Stock
Exchange Association Ltd.)
(2) Forfeiture is in the nature of penal proceedings. It is valid if only if the provisions of
the Articles are strictly complied with.
(3) The power of forfeiture must be exercised bonafide, in the interests of the
company.
Procedure
The procedure to be followed is laid down in Table A of Schedule I to the Companies
Act. Articles of a company, usually, contain similar provisions. The procedure to be
followed is narrated below.
(1) The company must serve a notice on the defaulting shareholder requiring payment
of the unpaid call together with any interest which may have accrued (Articles 29 of
Table A).
(2) The notice must -
(a) give not less than 14 days time from the date of service of notice for the
payment of the amount due.
(b) state that in the event of non-payment of the amount due within the period
mentioned in the notice, the shares in respect of which the call was made will
be liable to be forfeited (Article 30 of Table A).
The notice of forfeiture must also specify the exact amount due from the
shareholder. If the notice is defective in any respect e.g. where it does not specify
the amount claimed by the company, or where it claims a wrong amount, the
forfeiture will be invalid.
(3) If the defaulting share holder does not payment the amount within the specified
time as required by the notice, the directors must pass a resolution forfeiting the
shares (Article 31 of Table A).
Question 42
After receiving 80% of the minimum subscription as stated in the prospectus, a
company allotted 100 equity shares in favour of ‘X’. The company deposited the said
amount in the bank but withdrew 50% of the amount, before finalisation of the
allotment, for the purchase of certain assets. X refuses to accept the allotment of
shares on the ground that the allotment is voilative of the provisions of the Companies
Act, 1956. Comment. (May 2003)
Answer
Allotment of Shares

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The company has received 80% of the minimum subscription as stated in the
prospectus. Hence the allotment is in contravention of section 69(1) of the Companies
Act and the allotment is irregular attracting the provisions of Section 71 of the
Companies Act 1956.
The consequences of such irregular allotment are as follows:
The allotment is rendered voidable at the option of the applicant. The option must
however be exercised -
(i) With in 2 months after the holding of the statutory meeting of the Company; or
(ii) Where the Company is not required to hold a statutory meeting or where the
allotment is made after the holding of the statutory meeting, within 2 months after
the date of allotment [Section 71(1)].
The irregular allotment is voidable even if the company goes into liquidation on the
meantime [section 71(2)].
In view of the above, refusal by ‘X’ to accept the allotment of shares on the ground that
the allotment is violative of the provisions of the Companies Act is valid provided he
has exercised his option to avoid the allotment within the period mentioned in Section
71(1) of the Companies Act.
The Company has also violated the provisions of Section 69(4) of the Companies Act in
withdrawing 50% of the amount deposited with the bank before receiving the entire
amount payable on application for shares in respect of the minimum subscription.
Question 43
The Directors of a company registered and incorporated in the name “Mars Textile
India Ltd.” desire to change the name of the company entitled “National Textiles and
Industries Ltd.” Advise as to what procedure is required to be followed under the
Answer
Change In the Name of Company:
In the first instance, Mars Textile India Ltd., should ascertain from the Registrar of
Companies whether the proposed name viz. National Textiles and Industries Ltd. is
available or not. For this purpose, the company should file the prescribed Form No.1A
with the Registrar along with the necessary fees. The Registrar after examination will
inform whether the new name is available or not for registration.
In case the name is available, the company has to pass a special resolution approving
the change of name to National Textiles and Industries Ltd.
Thereafter the approval of the Central Government should be obtained as provided in
Section 21 of the Companies Act, 1956. The power of Central Government in this
regard has been delegated to the Registrar of companies. Thus, the company has to
file an application along with the prescribed filing fee for change of name. The change
of name shall be complete and effective only on the issue of a fresh certificate of
incorporation by the Registrar. The Registrar shall enter the new name in the Register
in place of the former name. The change of name shall not affect any rights or
obligations of the company and it shall not render defective any legal proceedings by
or against it.

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Question 44
The Board of Directors of a company decide to pay 5% of issue price as underwriting
commission to the underwriters. On the other hand the Articles of Association of the
company permit only 3% commission. The Board of Directors further decide to pay the
commission out of the proceeds of the share capital. Are the decisions taken by the
Board of Directors valid under the Companies Act, 1956? (May 2003)
Answer
Underwriting Commission
Considering the provisions of Section 76 of the Companies Act, 1956:
(i) The payment of commission should be authorised by the articles.
(ii) The amount of commission should not exceed, in the case of shares, 5% of the
price at which the shares have been issued or the amount or rate authorised by the
articles whichever is less, and in the case of debentures, it should not exceed 2-
1/2%.
Answer to problem:
Thus taking into account the above provisions it is concluded that the Board of
Director’s decision to pay 5% is not valid, since the payment cannot exceed 3% as
provided in the Articles of the company. Secondly, decision of the Board to pay the
commission out of capital is valid since underwriting commission can be paid both out
of capital as well as out of profits (Madan Lal Fakir Chand v. Shree Changdeo Sugar
Mills Ltd. MR (1962) s.c. 1543).
Question 45
Explain the provisions of the Companies Act, 1956 relating to establishment of an
“Investors Education and Protection Fund.” (May 2003)
Answer
Investor Education & Protection Fund:
A Fund called Investor Education and Protection Fund is established by Central
Government under section 205C of the Companies Act 1956. The fund will be utilised
for promotion of investor awareness and protection of investors [Section 205C(3)].
The fund will get amounts from the following sources [Section 205C(2)].
1. Amount of unpaid dividends.
2. Application moneys received by company for allotment of any securities and due
for refund.
3. Matured but unpaid deposits with companies.
4. Matured but unpaid debentures with companies.
5. Interest accured but unpaid on aforesaid amounts.
6. Grants and donations from Central Government, State Government, Companies or
any other Institutions.
7. Interest or other income received out of the investments from the fund.

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The amounts due for payment by company on account of dividend/refund of application
money/debentures repayment/deposits repayment will be kept by company for seven
years. If these are not claimed by investor/share holder within seven years, these will
be paid by company to the prescribed authority of the fund. Once the funds are
transferred, the liability of company ceases. The investor/shareho9lder is not entitled
to get any amount after it is transferred by company to the Fund.
A committee appointed by the Central Government will administer the investor fund
and spend moneys out of the fund for carrying out objects for which the fund has been
established. [Section 205C(3) and (4)].
Question 46
Advise the Board of Directors of a public limited dompany in relation to following
matters, under the provisions of the Companies Act, 1956:
Answer
Sources of Dividend Declaration and Transfer of Profits:-
The dividend can be declared or paid by a company for any financial year only;-
(i) out of profits of the company for that year arrived at after providing for
depreciation in the manner laid down in the Act; or
(ii) out of profits of the company for any previous financial year or years arrived at
after providing for depreciation, and remaining undistributed, or
(iii) out of both, or
(iv) out of moneys provided by Central Government or a State Government for the
payment of dividend in pursuance of a guarantee given by that Government
The Central Government may, if it thinks necessary so to do in the public interest, allow
any company to declare or pay dividend for any financial year out of the profits of the
company for that year or any previous financial year or years without providing for
depreciation. [Section 205(1)].
Transfer to Reserves Upto 10 Percent of Profits

Before any dividend is declared or paid by a company for any financial year out of the
profits of the company declared or paid by a company for any financial year out of the
profits of the company for that year, certain percentage of profits not exceeding 10
percent, as may be prescribed by Central Government, will be transferred to the
reserves of the company. The company may, however, voluntarily transfer a higher
percentage of its profits to the reserves.
The percentage of profits which have to be compulsorily transferred to reserves before
declaration of dividend have been prescribed as under the Companies (Transfer of
Profits to Reserves) Rules 1975:
Rate of proposed dividend as to paid up capital Minimum Amount to be transferred to
reserves out of current profits.
(a) Where it exceeds 10% but does not exceed 12.5% (a) 2.5% of current profits
(b) Where it exceeds 12.5% but does not exceed 15% (b) 5% of current profits

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(c ) Where it exceeds 15% but does not exceed 20% (c ) 7.5% of current profits
(d) Where it exceeds 20%. (d) 10% of current profits
If the proposed dividend des not exceed 10% then there is no statutory obligation to
transfer any amount to reserves out of current profits.
Question 47
A who holds one share certificate of 1000 Equity shares in a company, wants to
transfer 300 shares in favour of B. Explain the procedure to be followed for executing
the partial transfer under the provisions of the Companies Act, 1956. (May 2003)
Answer
Certification of Transfer:
Where a shareholder wishes to transfer only part of his shareholding or wishes to sell to
them to two or more persons, he is required to lodge the share certificate with the
company. Where he has already lodged with the company the relevant share
certificate, together with an instrument of transfer for part of the shares, he may
request the company to certify on the instrument of the transfer that the share
certificate for the shares covered by the instrument of transfer has been lodged with
the company. This is known as certification.
An instrument of transfer shall be deemed to be certified if it bears the words
‘certificate lodged’ or the words to the like effect. [Section 112(3)(a)]. Certification is,
therefore, the act of noting by the secretary etc. stating that the share certificate has
been lodged with the company. When only a portion of shares is transferred, the
company usually issued him a ticket for the balance of shares which have not been
transferred. Such a ticket is called a ‘balance ticket’.
The certification by a company of a transfer as above is to be taken as a representation
by the company to any person acting on faith of certification that there has been
produced to the company such documents as, on the face of them, show prima facie
title to the shares in the transfer. It is, however, not a representation that the
transferor has any title to the shares. (Section 112(1)).
The company will be responsible for the certification only if:

(a) the person issuing the installment is authorised to issue such installment on the
company’s behalf;
(b) the certificate is signed by any officer or servant of the company or any other
person authorised to certify transfer on the company’s behalf.
Thus X holding 1000 shares in AJD Co . Limited is advised to act for certification of
transfer in accordance with the provisions for partial transfer of his holding.
Question 48
State the conditions of restrictions with which a private company is incorporated under
the Companies Act, 1956. (November 2003)
Answer
Restrictive conditions on the basis of which a company may be incorporated
as a private company: Following are the restrictive conditions on the basis of which a

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company may be incorporated as a private company under the provisions of the
Companies Act, 1956:
1. Restrictions on the right to transfer its shares.
2. Limitations on the number of members to 50 excluding past and present employees
who are the members of the company.
3. Prohibition on inviting public to subscribe to any shares or debentures of the
company.
4. Prohibition on invitation or acceptance of deposits from persons other than its
members, directors or their relatives, [Section 3(1) (iii): Companies Act, 1956].
It is also necessary that every private company should have paid up capital of Rs. 1 Lac
or such higher capital as may be prescribed.
Question 49
Briefly explain the doctrine of “ultravires” under the Companies Act, 1956. What are
the consequences of ultravires acts of the company? (November 2003)
Answer
Doctrine of Ultra Vires and its effects: A company can do whatever is authorised
by its object clause in the Memorandum of Association. It can also do anything, which is
fairly incidental to or consequential upon the objects specified in the Memorandum.
Any act done beyond the scope of the object clause, as specified in the Memorandum,
is called ultra vires. Ultra means ‘beyond’ or ‘in excess of and vires means ‘power’.
Thus ultra vires means an act beyond or in excess of the power of the company.
The leading case on the point is Ashbury Rly. Carriage & Iron Co. Ltd V. Riche Where it
was held that since the contract entered into by the company was not within the
powers of the company as stated in the Memorandum, it was ultra vires the company
and void so that even the subsequent assent of the whole body of shareholders could
ratify it.
Effect of Ultra Vires transactions:
1. Injunction: Whenever a company does or proposes to do something beyond the
scope of its activities or objects as laid down in the Memorandum, any of its
members can get an injunction from the Court restraining the company from
proceeding with the ultra vires act.
2. Personal liability of directors: Any member of a company can maintain an action
against the directors of the company to compel them to restore to the company the
funds of the company that have been employed by them in ultra vires transactions.
3. Breach of warranty of authority: When an agent exceeds his authority, he is
personally liable for breach of warranty of authority in a suit by the third party.
4. Ultra vires contract. A contract of a company which is ultra vires the company is
void ab intio and no legal effect.
5. Ultra vires acquired property: Although ultra vires transactions are void, yet if a
company has acquired some property under an uira vires transaction it has the
right to hold that property and protect it against damage by other persons.
6. Ultra vires torts: A company is not liable for torts committed by its agents or
servants during the course of ultra vires transactions.

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Question 50
The Articles of Association of Mars Company Ltd. provides that documents may be
served upon the company only through Fax. Ramesh despatches a document to the
company by post, under certificate of posting. The company does not accept it on the
ground that it is in violation of the Articles of Association. As a result Ramesh suffers
loss. Explain with reference to the provisions of the Companies Act, 1956:
(i) What refusal of document by the company is valid?
(ii) Whether Ramesh can claim damages on this basis?(November 2003)
Answer
Problem on service of document upon a company: The problem as asked in the
question is based on the provisions of the Companies Act, 1956 as contained in Section
51. Accordingly a document may be served on a company or on its officer at the
registered office of the company. It must be sent either by post or by leaving it at its
registered office. If it is sent by post, it must be either by post under a certificate of
posting or by registered post. When a notice has been addressed to the company and
served on the directors, it constitutes a good service (Benabo v. Jay (William) and
Partners Ltd.) The articles of a company which contain the provisions contrary to
Section 51 cannot be enforced nor can they limit the mode of service to only one of the
modes provided by the Statute (Sadasiv Shankar Dandige V. Gandhi Seva Samaj Ltd.).
Accordingly in the first case the refusal by the Mars Company Ltd. of the service of the
document is not valid.
In the second case Ramesh can claim damages on this account from the Company.
Question 51
State the conditions which are required to be fulfilled before declaration of “Interim
Dividend” under the Companies Act, 1956. (November, 2003)
Answer
Interim Dividend; Conditions to be fulfilled: According to section 2(14A)
“dividend” includes interim dividend. Board can declare interim dividend, as it is
authorized by section 205(1A) unless it is specifically prohibited on the articles.
According to Section 205(1C), the provisions contained on (Sections 205, 205A, 205C,
206 206A, and 207) shall, as far as may be, also apply to any “Interim dividend”.
According to section 205(i), dividend can be paid only out of profits. Hence, before
declaring an interim dividend, the directors must satisfy themselves that:
1. the financial position of the company warrants the payment of such dividend out of
profits available for distribution.
2. the interim accounts prepared by the company must disclose profits sufficient for
the declaration of dividend after making appropriate provisions for depreciation,
compulsory transfers to reserves, bad debts and other contingencies, only then the
proportion of profits which have to be distributed as interim dividend may be
decided.
3. the company must also be in a position to deposit the amount of interim dividend in
a separate bank account within 5 days from the date of declaration of interim
dividend.

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Question 52
Explain the provisions of the Companies Act, 1956 relating to the procedure to be
followed for transacting business of the general meeting of members of a company
through postal ballot..
(November 2003)
Answer
Procedure for transacting business of the General Meeting through Postal Ballot
The new section 192(A) of the Companies Act 1956, provides for procedures to be
followed by the company for ascertaining the views of the members by postal ballot.
Procedure to be followed for conducting business through postal ballot is as under:
(i) The company may make a note below the notice of general meeting for
understanding of members that the transactions) at serial number requires consent
of shareholders through postal ballot.
(ii) The board of directors shall appoint one scrutinizer, who is not in employment of
the company, may be a retired judge or any person of repute who, in the opinion of
the board can conduct the postal ballot voting process in a fair and transparent
manner.
(iii) The scrutinizer will be in a position for 35 days (excluding holidays) from the date of
the issue of notice for annual general meeting. He has to summit his final report on
or before the said period.
(iv) The scrutinizer will be willing to be appointed and he is available at the registered
office of the company for the purpose of ascertaining the requisite majority.
(v) The scrutinizer shall maintain a register to record to consent or otherwise received,
including electronic media, mentioning the particulars of name, address, folio
number, number of share, nominal value of shares, whether the shares have voting,
differential voting or non-voting rights and the scrutinizer shall also maintain record
for postal ballot which are received in defaced or mutilated form. The postal ballot
and all other papers relating to postal ballot will be under the safe custody of the
scrutinizer till the chairman considers, approves and signs the minutes of the
meeting. Thereafter, the scrutinizer shall return the ballot papers and other related
papers/registers safely till the resolution is given effect to:
(iv) Consent or otherwise relating to issue mentioned in notice for annual general
meeting received after 35 days from the date of issue will be strictly treated as if
the reply from the member has not been received. (Companies (Passing of the
resolution by Postal Ballot) Rules, 2001. Notification No. G.S.R. 337 (E), dated 10th
May, 2001).
Question 53
A Company was incorporated on 6th October, 2003. The certificate of incorporation of
the company was issued by the Registrar on 15th October, 2003. The company on 10th
October, 2003 entered into a contract, which created its contractual liability. The
company denies from the said liability on the ground that company is not bound by the
contract entered into prior to issuing of certificate of incorporation. Decide, under the
provisions of the Companies Act, 1956, whether the company can be exempted from
the said contractual liability.

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(November 2003)
Answer
Certificate of Incorporation and the binding effect:
Upon the registration of the documents as required under the Companies Act, 1956 for
incorporation of a company, and on payment of the necessary fees, the Registrar of
Companies issues a Certificate that the company is incorporated (Section 34).
Section 35 provides that a certificate of incorporation issued by the Registrar is
conclusive as to all administrative acts relating to the incorporation and as to the date
of incorporation. The facts as given in the problem are similar to those in case of
Jubilee Cotton Mills v. Lewis (1924) A.C. 1958 where it was held that an allotment of
shares made on the date after incorporation could not be declared void on the ground
that it was made before the company was incorporated when the certificate of
incorporation was issued at a later date.
Applying the above principles the contention of the company in this case cannot be
tenable. It is immaterial that the certificate of incorporation was issued at a later date.
Since the company came into existence on the date of incorporation stated on the
certificate, it is quite legal for the company to enter into contracts. To conclude the
contracts entered into by the company before the issue of certificate of incorporation
shall be binding upon the company. The date of issue of certificate is immaterial.
Question 54
Dinesh, a director in a company, gave in writing to the company that notice for any
General Meeting and the Board of Directors’ Meeting be sent to him at his address in
India only by Registered Mail and for which he paid sufficient money. The company
sent two notices to him, of such meetings, by ordinary mail, under certificate of
posting. Dinesh did not receive the said notices and could not attend the meetings and
the proceedings thereof on the ground of improper notice. Decide in the light of the
provisions of the Companies Act, 1956:
(i) Whether the contention of Dinesh is valid?
(ii) Would you answer be still the same in case Dinesh remained outside India for two
months (when such notices were given and meetings held) (November 2003)
Answer
Problem on notice and validity of proceedings of the meeting: The problem as
asked in the question is based on the provisions of the Companies Act, 1956 as
contained in Section 172 read with Section 53. Accordingly, the notice may be served
personally or sent through post to the registered address of the members and, in the
absence of any registered office in India, to the address, if there be any within India
furnished by him to the company for the purpose of servicing notice to him. Service
through post shall be deemed to have effected by correctly addressing, preparing and
posting the notice. If, however, a member wants to notice to be served on him under a
certificate or by registered post with or with acknowledgement due and has deposited
money with the company to defray the incidental expenditure thereof, the notice must
be served accordingly, otherwise service will not be deemed to have been effected.
Accordingly, the questions as asked may be answered as under:

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(i) The contention of Diensh shall be tenable, for the reason that the notice was not
properly served and meetings held by the company shall be invalid.
(ii) In view of the provisions of the Companies Act, 1956, as contained in Section 172,
the company is not bound to send notice to Dinesh at the address outside India.
Therefore, answer in the second case shall differ from the first one.
Question 55
Explain the provisions of the Companies Act, 1956 relating to holding of Annual
General Meeting of the Company with regard to the following:
(i) Period within which the first and the subsequent Annual General Meetings must be
held.
(ii) Business which may be transacted at an Annual General Meeting. (November
2003)
Answer
Annual General Meeting provisions under the Companies Act, 1956:
(i) Period Within which first and the subsequent AGM must be held:
(a) In accordance with the provisions of the Companies Act, 1956 as contained in
incorporation, and so long as the company hold its first annual general meeting
within that period, the company need not hold any general meeting in the year
of incorporation or in the following year (First proviso to Section 166(1). Further,
the date of the first AGM must be within 9 months from the date of the financial
year for which profit and loss account has been made,
(b) Any subsequent AGM must be held not later than 6 months form the close of
the financial year of the company. The gap between the two consecutive AGMs
must not be more than 15 months [Section 166(1)]. Further the second proviso
to Section 166(1) states that the Registrar may, for any special reason, extend
the time within which any AGM (not being the first AGM) shall be held by a
period not exceeding 3 months.
(ii) Business to be Transacted at an Annual General Meeting: The following two
businesses may be transacted at an annual general meeting:
1. Ordinary Business; Viz.
(a) Consideration of Annual Accounts, Directors Report etc.
(b) Declaration of Dividend.
(c) Election of Directors.
(d) Appointment of auditors and fixation of their remuneration.
2. Special Business: Any business other than above 4 shall be special business,
which may be transacted at any AGM.
Question 56

CA-IPCC
What are the provisions of the Companies Act, 1956 relating to the appointment of
‘Debenture Trustee’ by a company? Whether the following can be appointed as
‘Debenture Trustee’:
(i) A shareholder who has no beneficial interest.
(ii) A creditor whom the company owes Rs. 499 only.
(iii) A person who has given a guarantee for repayment of amount of debentures issued
by the company. (November 2003)
Answer
Appointment of Debenture Trustee: Section 117 B as introduced by the Companies
(Amendment) Act, 2000 deals with the appointment and duties of debenture trustees.
It is now provided that before issue of prospectus or letter of offer for the debentures,
the company should appoint one or more debenture trustees and disclose their names
and also state that they have given their consent. It is also provided that (i) a
shareholder who has beneficial interest in shares (ii) creditor or (iii) a person who has
given guarantee for repayment of principal and interest in respect of the debentures
cannot be appointed as a debenture trustee.
Thus based on the above provisions answers to the given questions are:
(i) A shareholder who has no beneficial interest can be appointed as a debenture
trustee.
(ii) A creditor whom company owes Rs. 499 cannot be so appointed. The amount owed
is immaterial.
(iv) A person who has given guarantee for repayment of principal and interest thereon
in respect of debentures also cannot be appointed as a debenture trustee.
Question 57
Examine the provisions of the Companies Act, 1956 regarding ‘nomination’ in case of
transmission of shares (November 2003)
Answer
Operation of nomination facility in case of transmission of shares under the
provisions of Companies Act, 1956: If nominee becomes entitled to any shares by
virtue of nomination, he will apply to company along with proof of death of holder/joint-
holders. He can either request Board to register himself as the shareholder or he can
transfer the shares of deceased shareholder [Section 109B(1)j. Thus, the nominee can
either register his name or directly transfer the shares in some others’ name.
If he elects to be registered holder of shares, he will have to send a written notice to
the company stating that he elects to be the registered holder. Such notice should be
accompanied by death certificate of shareholder [Section 109B(2)].
All limitations, restrictions and provisions of the Act relating to the right of transfer and
registration of transfer will apply as if the application is for transfer of shares [Section
109B(3)]. In other words, transfer in name of nominee or other person to whom
nominee intends to transfer shares can be declined only on the grounds on which any
transfer can be declined, and no other grounds.

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The nominee is entitled to all rights of deceased member like dividend and bonus.
However, he will not be eligible for voting rights or other rights as a member, unless he
makes application in writing and is registered as a member in respect of the shares.
The nominee must either register himself as member or transfer the shares in some
others name. If he does neither, company can send him a notice to elect either to
become a member or transfer the shares. If the nominee does not comply within 90
days, Board can withhold payment of dividends, bonuses or other money payable, till
the requirement of notice is complied with [Section 109B(4)].
Question 58
What do you understand by Pre-incorporation Contracts? Distinguish between Pre-
incorporation contracts and Provisional contracts. (May 2004)
Answer
Pre-Incorporation Contracts
The promoters of a company usually enter into contracts to acquire some property or
right for the company to be incorporated. Such contracts are called pre-incorporation
contracts or preliminary contracts. Since a company comes into existence from the
date of its incorporation, it follows that any act purporting to be performed by it prior to
that date is of no effect so far as the company is concerned. After incorporation, the
company may adopt the preliminary contract and it must be by novation. Further a
company may enforce a pre-incorporation contract if it is warranted by the terms of
incorporation of the company.
Following are the differences between Pre-incorporation and
Provisional Contracts:
(i) Contracts, which are made before the company comes into existence, are called
pre-incorporation contracts, while contracts which are entered into by a public
company after obtaining the certificate of incorporation but before getting the
certificate to commence business are known as provisional contracts.
(ii) The company is not bound by the pre-incorporation contract unless the company
adopts the same after incorporation. But provisional contracts shall be binding on
the company from the date on which the company is entitled to commence
business.
(iii) Pre-incorporation contracts can be enforced against the company if it is warranted
by the terms of incorporation of the company and for the purposes of the company,
while the provisional contracts cannot be enforced should the company go into
liquidation without commencing business.
Question 59
What is the procedure laid down in the provisions of the Companies Act, 1956 for
converting a private company into a public company ? (May 2004)

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Answer
Conversion of Private Company into a Public Company
Procedure for conversion of a private company into a public company is as follows:
(i) Take necessary decision in its Board Meeting and fix up time, place and Agenda for
convening Annual General Meeting.
(ii) Amend Memorandum to change its name by removing the word ‘Private’ by a
special resolution. Approval of Central Government is not necessary for change of
name.
(iii) Must pass a special resolution deleting from its articles the requirements of a
private company under Section 3(1)(iii). Such other articles which do not apply to a
public company should be deleted and those which apply should be inserted. A
copy of the special resolution must be filed with the Registrar of Companies within
30 days. It becomes a public company on the date of alteration [Section 44(1)(a)].
(iv) Increase the number of shareholders to at least 7 and number of directors to at
least 3.
(v) Within 30 days from the passing of the Special Resolution, a prospectus or a
statement in lieu of prospectus in the prescribed form must be filed with the
Registrar [Section 44(1)].
(vi) The aforesaid prospectus or the statement in lieu of prospectus must be in
conformity with Part I and II of Schedule II or with Part I and II of Schedule IV
respectively. The prospectus or statement in lieu of prospectus must be true and
not misleading [Section 44(2) and (3)].
(vii) The company has to apply to the Registrar for the issue of a fresh Certificate of
Incorporation, for the changed name, namely, the existing name with the word
‘private’ deleted.
Question 60
Can a company issue shares at discount? What is the law, in this relation, laid down in
the Companies Act, 1956? (May 2004)
Answer
Issuing shares at discount
A company cannot issue shares in disregard of section 79. It may issue shares at a
discount only if all the following conditions are fulfilled.
(i) The shares must be of a class already issued.
(ii) The issue must have been authorised by a resolution passed by the company in
general meeting, a sanctioned by the Company Law Board/Central Government.
(iii) The said resolution must specify the maximum rate of discount at which the shares
are to be issued. By virtue of the proviso added to Section 79 by the Amendment
Act, 1974, no such resolution shall be sanctioned by the Company Law
Board/Central Government if the maximum rate of discount specified in the
resolution exceeds 10%, unless the Company Law Board/Central Government is of
the opinion that a higher percentage of discount may be allowed in the special
circumstance of the case.

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(iv) At the date of issue, not less than one year ought to have elapsed since the date on
which the company was entitled to commence business.
(v) Lastly, the shares to be issued at a discount have issued within 2 months after the
date of the Company Law Board/Central Government sanction or within the time
extended by it.
(vi) Every prospectus relating to the issue of the shares must contain particulars of
the discount allowed on the issue of the shares or so much of that discount as has
not been written off at the date of issue of the prospectus.
Unless all the above conditions are fulfilled, a company cannot issue shares at
discount.
Question 61
The Articles of Association of a Limited Company provided that ‘X’ shall be the Law
Officer of the company and he shall not be removed except on the ground of proved
misconduct. The company removed him even though he was not guilty of misconduct.
Decide, whether company’s action is valid? (May 2004)
Answer
Removal of Law Officer
The Memorandum and Articles of Association of a company are binding upon company
and its members and they are bound to observe all the provisions of memorandum and
articles as if they have signed the same [Section 36(1)] However, company and
members are not bound to outsiders in respect of anything contained in
memorandum/articles. This is based on the general rule of law that a stranger to a
contract cannot acquire any right under the contract.
In this case, Articles conferred a right on ‘X’, the law officer that he shall not be
removed except on the ground of proved misconduct. In view of the legal position
explained above, ‘X’ cannot enforce the right conferred on him by the articles against
the company. Hence the action taken by the company (i.e. removal of ‘X’ even though
he was not guilty of misconduct) is valid. (Eley V Positive Govt. Security Life Assurance
Co., Major General Shanta Shamsher jung V Kamani Bros. P. Ltd.)
Question 62
“Diminution of capital does not constitute reduction of capital within the provisions of
the Companies Act, 1956,” – Comment. (May 2004)

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Answer
Diminution/Reduction of Capital
Section 94(3) of the Companies Act, 1956 specifically states that diminution does not
constitute a reduction of capital within the meaning of the Companies Act. Distinction
can be made between the two on the following grounds:
(i) Diminution of capital is the cancellation of the unsubscribed part of the issued
capital while reduction of capital involves reduction of subscribed capital or paid-up
capital.
(ii) Both require authorisation by articles but whereas diminution can be effected by an
ordinary resolution, while reduction can be effected by a special resolution.
(iii) Diminution needs no confirmation by the Court/Tribunal [Section 94(2)], but
reduction needs such confirmation (Section 101).
(iv) A Company may be ordered to add the words ‘and reduced’ after its name in case
of reduction but no such order can be passed in case of diminution.
Question 63
A company issued a prospectus. All the statements contained therein were literally
true. It also stated that the company had paid dividends for a number of years, but did
not disclose the fact that the dividends were not paid out of trading profits, but out of
capital profits. An allottee of shares wants to avoid the contract on the ground that the
prospectus was false in material particulars. Decide. (May 2004))
Answer
Mis-leading Prospectus
Any person who takes shares on the faith of statement of facts contained in a
prospectus can rescind the contract if those statements are false or untrue. The words
‘untrue statement’ have to be construed as explained in Section 65(1)(a), which says
that a statement included in a prospectus shall be deemed to be untrue, if the
statement is misleading in the form and context in which it is included. Again, where
the omission from a prospectus of any matter is calculated to mislead, the prospectus
is deemed, in respect of such omission to be a prospectus in which an untrue
statement is included [Section 65(1)(b)].
In this case, the fact that dividends were paid out of capital profit and not out of
trading profits was not disclosed in the prospectus and to that extent the prospectus
contained a material misrepresentation of a fact giving a false impression that the
company was a profitable one. Hence the allottee can avoid the contract of allotment
of shares. (Rex V. Lord Kylsant).

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Question 64
Which of the institutions are regarded as “Public Financial Institutions” under the
Answer
Public Financial Institutions
By virtue of Section 4A of the Companies Act, 1956 the following institutions are to be
regarded as public financial institutions:
(i) The Industrial Credit and Investment Corporation of India Ltd.
(ii) The Industrial Finance Corporation of India
(iii) The Life Insurance Corporation of India
(iv) The Industrial Development Bank of India
(v) The Unit Trust of India
(vi) The Infrastructure Development Finance Company Ltd.
(viii) The Securitisation Co., or The Reconstruction Co. which has been registered
under The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act,. 2002.
The Central Government is empowered under Section 4A(2) to add any other institution
to the above list. This addition has to be made through a notification, in the Official
Gazette. Secondly, the institution for being added to the existing list, (I) must have
been established or constituted by or under any Central Act; or (ii) at least 51% of the
paid-up share capital of such new institution is held or controlled by the Central
Government. In exercise of this power, the Central Government has notified more than
30 institutions as Public Financial Institutions.
Question 65
What is the concept of “charge” under the provisions of the Companies Act, 1956?
Point out the circumstances where under a floating charge becomes a fixed charge.
(May 2004)
Answer
Meaning of Charge
The word ‘charge’ has not been adequately defined in the Companies Act, 1956 except
that Section 124 provides that the expression charge shall include a mortgage.
However, it can be understood that where in transaction for value, both parties’
evidence the intention that property existing or future shall be made available as
security for the payment of a debt and that the creditor/mortgage shall have a present
right to have it made available, there is a charge.
The conditions of borrowing, as they normally do confer charge on the company’s
assets (movables as well as immovables). It is thus important for those dealing with
the company to know how much of its assets are subjected to charges or actually
charged. To this end, Section 125 of the Act contain provisions whereby particulars of
charges which encumber company’s properties without actually delivering possession

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thereof to be filed and registered on the company’s file at the office of the registry i.e.
Registrar of Companies.
Under Section 125 of the Act certain charges are required to be registered with the
Registrar of Companies. If any of these charges are not registered, then the
unregistered charge shall be void against the liquidators and creditors of the company.
(Monolithic Building (Co.). The money secured thereby becomes immediately payable.
[Section 125(3)].
Crystallisation of a Floating Charge
Floating charge crystallizes under the following circumstances:
1. When the company goes into liquidation, or
2. When the company ceases to carry on business, or
3. When a receiver is appointed, or
4. When default is made in paying the principal and/or interest and the holder of the
charge brings an action to enforce his security.
Question 66
Explain the provisions of the Companies Act, 1956 relating to registration of a non-
profit organisation as a company. What procedure is required to be adopted for the
said purpose?
(May 2004)
Answer
Associations not for Profit
According to Section 13, the name of a limited company must end with the word
‘Limited’ in the case of a Public Company, and with the words “Private Limited” in the
case of a private company. Section 25 of the Companies Act, 1956, however, permits
the registration, under a licence granted by the Central Government, of an association
not for profit with limited liability without adding the word “Limited” or the words
“Private Limited” to its name.
Conditions for grant of licence
The Central Government may grant such a licence to an association where it is proved
to the satisfaction of the Central Government that it-
(a) Is about to be formed as a limited company for promoting commerce, science,
religion, charity or any other useful object; and
(b) Intends to apply its profits, if any, or other income in promoting its objects and to
prohibit the payment of any dividend to its members.
The Central Government may, by licence, direct that the association may be registered
as a company with limited liability, without the addition to its name of the word
“Limited” or the words “Private Limited”. The association may thereupon be registered
accordingly. On registration it enjoys all the privileges, and is subject to all the
obligations of limited companies.
A licence may be granted by the Central Government on such conditions and subject to
such regulations, as it thinks fit. The condition and regulations are binding on the body

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to which the licence is granted. The licence may be revoked at any time by Central
Government after giving an opportunity to the company for being heard.
Procedure for Registration of a Company under Section 25
The promoters must apply to the Central Government for a licence under Section 25 for
registration of the company without the word ‘limited’ or ‘Private Limited’ as part of its
name. The promoters must comply with the conditions subject to which the licence is
issued. Thereafter apply to Registrar of Companies for incorporation of the company in
the manner in which any other company is registered i.e., filing of documents like
Memorandum of Association, Articles of Association, list of first directors, declaration in
the prescribed form.
Question 67
What are the purposes for which “objects” can be altered by a company under the
Companies Act, 1956? Briefly explain the procedure to be applied to such matters.
(May 2004)
Answer
Alteration of Objects
Section 17 of the Companies Act, 1956 permits the alteration of the objects, only so far
as is considered necessary for specified purpose. Such purposes are as under [Section
17(1)]:
(a) to carry on business more economically.
(b) to attain the main purpose of the company by new or more improved means.
(c) to carry on some business which under the existing circumstances may
conveniently or advantageously be combined with the existing business.
(d) to change and enlarge the local areas of operations.
(e) to restrict or abandon any of the existing objects.
(f) to sell or dispose of the whole or any part of the undertaking.
(g) to amalgamate with any other object or body of persons.
Procedure
Companies are now under liberty to alter the object clause of the memorandum of
association without the confirmation from Company Law Board. However, alteration
can be made only on the grounds stated above.
Object clause can be altered simply by passing a special resolution in general meeting
of members. The special resolution should be filed with the Registrar of Companies
within one month from the date of resolution along with a printed copy of the
memorandum as altered. The Registrar will register the document and issue a
certificate, which will be conclusive evidence that all the requirements with respective
alterations have been complied with and memorandum so altered shall be the
memorandum of the company.
If the documents required to be filed with the Registrar under Section 18 are not filed
within the prescribed time, the alteration shall at the expiry of such period, become
void and inoperative (Section 19).
Question 68

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Explain the concept of “Deemed Prospectus” under the Companies Act, 1956. Point
out the circumstances where under issuing the prospectus is not mandatory. (May
2004)
Answer
Deemed Prospectus
In order to avoid the rigorous requirements of prospectus, one practice was to issue
shares to another person. Such other person (often called ‘Issue House’) would then
make further offer of sale of their shares to public by advertisements, etc. In order to
curb this tendency Section 64 provides that ‘offer of sale’ or advertisement of such
‘Issue House’ will be deemed to be prospectus issued by the company. This is called
deemed prospectus. All enactments and rules of law as to the contents of prospectus
and as to the liability in respect of statements, omissions from prospectus under
Section 60, the persons making the offer of sale to the public are to be deemed as
directors of the company [Section 64(4)].
The ‘offer of sale’ by Issue House will not be considered as ‘Prospectus’ only when (a)
company receives full consideration in respect of shares/debentures allotted to Issue
House or agreed to be allotted to them and (b) offer of sale is made at least 6 months
after the shares were allotted to them [Section 64(2)].
Additional information to be stated in such documents are (1) net amount of
consideration received or to be received by the company in respect of shares or
debentures to which offer relates and (2) place and time at which the contract under
which the shares or debentures have been allotted or are to be allotted may be
inspected [Section 64(3)].
When Prospectus need not be issued
The issue of prospectus under Section 56 of the Companies Act, 1956 is not necessary
in the following circumstances even though the shares are offered and applications
forms issued to the public by the company:
(i) Where a person is a bona fide invitee to enter into an underwriting agreement with
regard to shares or debentures. (Section 56(3)(a)].
(ii) Where shares or debentures are not offered to the public (Section 56(3)(b)].
(iii) Where shares or debentures offered are in all respects uniform with shares or
debentures alrea dy issued and quoted at a recognised Stock Exchange. (Section
56(5)].
(iv) Where the shares or debentures are offered to the existing shareholders or
debenture-holders respectively [Section 56(5)].
Question 69
Some of the creditors of M/s Get Rich Quick Ltd. have complained that the company
was formed by the promoters only to defraud the creditors and circumvent the
compliance of legal provisions of the Companies Act, 1956. In this context they seek
your advice as to the meaning of corporate veil and when the promoters can be made
personally liable for the debts of the company. (November 2004)
Answer
Corporate Veil

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After incorporation the company in the eyes of law is a different person altogether from
the shareholders who have formed the company. The company has its own existence
and as a result the shareholders cannot be held liable for the acts of the company even
though the shareholders control the entire share capita! of the company. This is
popularly known as Corporate Veil and in certain circumstances the courts are
empowered to lift or pierce the corporate veil by ignoring the company and directly
examine the promoters and others who have managed the affairs of the company after
its incorporation. Thus, when the corporate veil is lifted by the courts, (i.e., the courts
have disregarded the company as an entity), the promoters can be made personally
liable for the debts of the company. In the following circumstances, corporate veil can
be lifted by the courts and promoters can be held personally liable for the debts of the
company.
(i) Trading with enemy country.
(ii) Evasion of taxes.
(iii) Forming a subsidiary company to act as its agent.
(iv) The benefit of limited liability is destroyed by reducing the number of members
below 7 in the case of public company and 2 in the case of private company for
more than six months.
(v) Under law relating to exchange control.
(vi) Device of incorporation is adopted to defraud creditors or to avoid legal obligations.
Question 70
M/’s ABC Ltd. a company registered in the State of West Bengal desires to shift its
registered office to the State of Maharashtra. Explain briefly the stops to be taken to
achieve the purpose.
Would it make a difference, if the Registered Office is transferred from the Jurisdiction
of one Registrar of Companies to the jurisdiction of another Registrar of Companies
within the same State? (November 2004)

CA-IPCC
Answer
Transfer of Registered Office of a Company
In order to shift the registered office from the State of West Bengal to the State of
Maharashtra, M/s ABC Ltd has to take the following steps:
(i) To pass a special resolution and thereafter file the same with the Registrar of
Companies.
(ii) To fife a Petition before the Company Law Board (Central Government)* under
Section 17, of the Companies Act, 1956.
(iii) To give an advertisement in two newspapers one in English language and the other
in local language indicating the change and any member/creditor having objection
can write to the Company Law Board (Central Government)*.
(iv) To give notice to the State Government of West Bengal.
(v) To submit all the required documents along with the fee to Company Law Board
(Central Government)*.
The Company Law Board (Central Government)* after hearing the petition passes an
order confirming the alteration in the memorandum of association of the company
regarding the shifting of the registered office. The Company Law Board’s (Central
Government)* order should be filed by ABC Ltd with both the Registrars of Companies
West Bengal and Maharashtra. After registration of the said order the Registrar of
Companies Maharashtra will issue a certificate which is the conclusive proof that ali the
formalities have been complied with.
Change of registered office from the jurisdiction of one Registrar to the other
Registrar within the same State: The procedure and law pertaining to the change of
registered office from the jurisdiction of one Registrar to the other Registrar within the
same State is contained in Section 17A of the Companies Act, 1956 as amended upto
date is as follows:
(i) Company can do so only if the Regional Director permits to it.
(ii) Application for permission has to be made on a prescribed form.
(iii) The Regional Directors are required to confirm the Company’s application and
inform it accordingly within a period of four weeks.
(iv) After getting the confirmation of the Regional Director, the company must file a
copy of the same with the Registrar of Companies within two months from the date
of the confirmation together with a copy of the altered memorandum.
(v) The Registrar is required to register the same and inform the company within one
month from the date of filing.
(vi) The Registrar’s certificate is a conclusive evidence of the fact of alteration and of
compliance with the requirements (Section 17-A).
(*Note: Students may kindly note that, all Sections of the Companies (Second
Amendment) Act, 2002 have not come into force. Till such time, jurisdiction of
Company Law Board will continue to remain unchanged.)
Question 71
M/s Honest Cycles Ltd. has received an application for transfer of 1,000 equity shares
of Rs. 10 each fully paid up in favour of Mr. Balak. On scrutiny of the application form it

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was found that the applicant is minor. Advise the company regarding the contractual
liability of a minor and whether shares can be allotted to the Balak by way of transfer.
(November 2004)
Answer
The Companies Act, 1956 does not prescribe any qualification for membership.
Membership entails an agreement enforceable in a court of law. Therefore, the
contractual capacity as envisaged by the Indian Contract Act, 1872 should be taken
into consideration. It was held in the case of Mohri Bibi Vs. Dharmadas Ghose (1930) 30
Cal. 531 (P.O.) that since minor has no contractual capacity, the agreement with a
minor is void. Therefore, a minor or a lunatic cannot enter into an agreement to
become a member of the company. However, the Punjab High Court held in the case of
Diwan Singh vs. Minerva Films Ltd (AIR 1956 Punjab 106) that there is no legal bar to a
minor becoming a member of a company by acquiring shares by way of transfer
provided the shares are fully paid up and no further obligation or liability is attached to
these. The same view was upheld by the Company Law Board in the case of S.L.
Bagree Vs. Britannia Industries Ltd (1980).
In view of the above, M/s Honest Cycles Ltd can give membership to Balak through
1000 shares, received by way of transfer, in favour of Mr. Balak a minor because the
shares are fully paid up and no further liability is attached to these.
Question 72
Explain briefly the distinction between shares and debentures and state whether a
company can issue debentures with voting rights. (November 2004)
Answer
The distinction between a share and a debenture is as under:
(i) Shares are a part of the capital of a company whereas debentures constitute a
loan.
(ii) The shareholders are the owners of the company whereas debenture holders are
creditors.
(iii) Shareholders generally enjoy voting right whereas debenture holders do not have
any voting right.
(iv) Interest on debentures is payable even if there are no profits. Dividend can be paid
to shareholders only out of the profits of the company.
(v) Debentures have generally a charge on the assets of the company but shares do
not carry any such charge.
(vi) The rate of interest is fixed in the case of debentures whereas on equity shares the
dividend may vary from year to year.
(vii) Debentures get priority over shares in the matter of repayment in the event of
liquidation of the company.
Issue of Debentures with voting rights
No company can issue any debentures carrying voting rights at any meeting (i.e.,
members’ general meeting) of the company, whether generally or in respect of any
particular class of shares (Section 117). This provision applies to debentures issued
after the commencement of the Companies Act (Section 117 of 1956 Act).

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Question 73
What is meant by “Abridged prospectus”. Under v^/hat circumstances a company
issuing abridged prospectus need not accompany the prescribed details along with the
application form for issue of shares? (November 2004)
Answer
Abridged Prospectus: As per Section 2(1) of the Companies (Amendment) Act, 2000
“abridged prospectus means a memorandum containing such salient features of a
prospectus as may be prescribed.” By the Amendment Act of 1988 the company was
permitted to furnish an abridged form of prospectus along with the application for
shares or debentures instead of the full prospectus. The Government has revised the
format of abridged prospectus to provide for greater disclosure of information to
prospective investors so as to enable them to take an informed decision regarding
investment in shares and debentures.
The abridged prospectus (in Form 2A) and the share application form should bear the
same printed number. The investor may detach the share application form along the
perforated line after he has had an opportunity to study the contents of the abridged
prospectus, before submitting the same to the company or its designated bankers.
Circumstances where details are not required in the abridged prospectus:
(1) Where the offer is made in connection with a bona fide invitation to a person to
enter into an undertaking agreement with respect to the shares or debentures.
(2) Where the shares or debentures are not offered to the public.
(3) Where the offer is made only to the existing members or debenture holders of the
company.
(4) Where the shares or debentures offered are in all respects uniform with shares or
debentures already issued and quoted on a recognized stock exchange.
(5) Where a prospectus is issued as a newspaper advertisement, it is not necessary to
specify the contents of the memorandum, or the names etc., of the signatories to
the memorandum or the number of shares subscribed for by them.
Question 74
M/s Low Esteem Infotech Ltd. was incorporated on 1.4.2003. No General Meeting of the
company has been held so far. Explain the provisions of the Companies Act, 1956
regarding the time limit for holding the first annual general meeting of the Company
and the power of the Registrar to grant extension of time for the First Annual General
Meeting. (November 2004)
Answer
According to Section 166 of the Companies Act, 1956, every company shall hold its first
annual general meeting within a period of 18 months from the date of incorporation.
Since M/s Low Esteem Infotech Ltd was incorporated on 1.4.2003, the first annual
general meeting of the company should be held on or before 30th September, 2004.
Even though the Registrar of Companies is empowered to grant extension of time for a
period not exceeding 3 months for holding the annual general meeting, such a power is
not available to the Registrar in the case of the first annual general meeting. Thus, the

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company and its directors will be liable for the default if the annual general meeting
was held after 30th September. 2004.
Question 75
Annual Genera! Meeting of a Public Company was scheduled to be held on 15.12.2003.
Mr. A, a shareholder, issued two Proxies in respect of the shares held by him in favour
of Mr. ‘X’ and Mr. T. The proxy in favour of ‘Y’ was lodged on 12.12.2003 and the one
in favour of Mr. X was lodged on 15.12.2003. The company rejected the proxy in favour
of Mr. X as the proxy in favour of Mr. Y was of dated 12.12.2003 and thus in favour of
Mr. X was of dated 13.12.2003. Is the rejection by the company in order? (November
2004)
Answer
In case more than one proxies have been appointed by a member in respect of the
same meeting, one which is later time shall prevail and the earlier one shall be deemed
to have been revoked. Thus, in the normal course, the proxy in favour of Mr. X, being
later in time, should be upheld as valid.
But, as per Section 176 of the Companies Act, 1956, a proxy should be deposited 48
hours before the time of the meeting. In the given case, the proxies should have,
therefore, been deposited on or before 13.12.2003 (the date of the meeting being
15.12.2003). X deposited the proxy on 15.12.2003. Therefore, proxy in favour of Mr. X
has become invalid. Thus, rejecting the proxy in favour of Mr. Y is unsustainable. Proxy
in favour of Y is valid since it is deposited in time.
Question 76
The Board of Directors of M/s Reckless Investments Ltd. have allotted shares to the
investors of the company without issuing a prospectus or filing a statement in lieu of
prospectus with the Registrar of Companies, Mumbai. Explain the remedies available to
the investors in this regard. (November 2003)
Answer
According to the provisions of Section 70 and 71 of the Companies Act, 1956, any
allotment of shares by a company without filing a prospectus or statement in lieu of
prospectus will become irregular allotment. The effect of it is that the allotment made
by M/s Reckless Investment Ltd will become voidable at the instance of the allottee i.e.,
the applicant for the shares within a period of two months from the date of allotment.
The allotment is voidable at the option of the investor applicant even if the company is
in the course of winding up. Further, the directors liable for the default are also liable to
compensate the company and the allottee respectively for any loss to which the
company may have sustained or incurred thereby. There is a time limit of two years for
claiming damages for loss. etc., by the investors.
Question 77
What is meant by a Guarantee Company? State the similarities and dissimilarities
between a Guarantee Company and a Company having Share Capital. (November
2004)

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Answer
Meaning of Guarantee Company: Where it is proposed to register a company with
limited liability, the choice is to limit liability by shares or by guarantee. Section 12(2)
(b) of the Companies Act, 1956 defines it as a company having the liability of its
members limited by the memorandum to such amount as the members may
respectively undertake by the memorandum to contribute to the assets of the company
in the event of its being wound up. Thus, the liability of the member of a guarantee
company is limited by a stipulated amount mentioned in the memorandum. The
members cannot be called upon to contribute more than the stipulated amount for
which they have guaranted in the memorandum of association of that company. The
articles of association of such company shall state the number of members with which
the company is to be registered.
Similarities and dis-similarities between the Guarantee Company and the
Company having share capital: The common features between a “guarantee
company” and the “company having share capital” are legal personality and limited
liability. In case of the later company, the members’ liability is limited by the amount
remaining unpaid on the shares, which each member holds. Both of them have to state
this fact in their memorandum that the members’ liability is limited.
However, the dissimilarities between a ‘guarantee company’ and ‘company having
share capital’ is that in the former case the members may be called upon to discharge
their liability only after commencement of the winding up and only subject to certain
conditions; but in latter case, they may be called upon to do so at any time, either
during the company’s life or during its winding up.
Further to note, the Supreme Court in Narendra Kumar Agarwal vs. Saroj Maloo (1995)
6 SC C 114 has laid down that the right of a guarantee company to refuse to accept the
transfer by a member of his interest in the company is on a different footing than that
of a company limited by shares. The membership of a guarantee company may carry
privileges much different from those of ordinary shareholders.
It is also clear from the definition of the guarantee company that it does not raise its
initial working funds from its members. Therefore, such a company may be useful only
where no working funds are needed or where these funds can be had from other
sources like endowment, fees, charges, donations etc.
Question 78
The Board of Directors of M/s Optimistic Company Lid. propose to pay interim dividend
of Rs.2 per equity share of Rs. 10 each. Advise the Board regarding:
(i) the time limit for payment of interim dividend to the shareholders, and
(ii) steps to be taken in case any dividend amount remains unpaid in the books of the
company. (November 2004)
Answer
The Board of directors of M/s Optimistic Company Ltd should take the following steps
for declaration and payment of interim dividend;
(i) The Board should carefully assess the adequacy of profits since in the event of
absence or inadequacy of profits, the distribution would amount to reduction of
capital.
(ii) The interim dividend amount should be deposited in a special bank account.

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(iii) Depreciation on assets should be provided for the full year.
(iv) If there is a carry forward loss from past years, the same should be adjusted
against the estimated profits.
(v) The company should transfer to reserves the prescribed percentage of the
estimated profits of the period arrived at after providing for current year’s
depreciation and arrears of depreciation/loss.
Time Limit:
Interim dividend should be paid within 30 days. If any amount of interim dividend
remains unpaid or unclaimed, for more than 30 days, the same should be transferred to
a special account in a Scheduled Bank called ‘Unpaid Interim Divided Account of M/s
Optimistic Company Ltd. Any amount remaining in the said bank account for a period of
seven years should be transferred to the Investor Education and Protection Fund
established under Section 205C of the Companies Act, 1956.
Question 79
The management of Ambitious Properties Ltd., has decided to take up the business of
food processing activity because of the downward trend in real estate business. There
is no provision in the object clauses of the Memorandum of Association to enable the
company to carry on such business. State with reasons whether its object clause can
be amended. State briefly the procedure to be adopted for change in the object
clause. (May 2005)
Answer
Section 17(1) of the Companies Act, 1956 permits a company to alter its objects for the
under mentioned purposes:
(1) to carry on business more economically;
(2) to attain the main purpose of the company by new and improved means;
(3) to carry on some business which the existing circumstances may conveniently or
advantageously the combined with be existing business;
(4) to change and enlarge the local area of operations;
(5) to restrict or abandon any of the existing objects;
(6) to sell or dispose of the whole or any part of the undertaking;
(7) to amalgamate with any other company or body of persons.
The case of the company is covered under point No. 3 above and therefore the
company can amend its object clause to take up the business of Food Processing
activity.
PROCEDURE
The company should amend the object clause by passing a special resolution in a
general meeting.
File with the Registrar of companies, a copy of the special resolution within one month
from the date of passing of such resolution together with a printed copy of the
memorandum as altered and the Registrar shall register the same and certify the
registration under his hand written one month from the date of filing of such
documents. The certificate is a conclusive evidence that all the requirements with

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respect to the alteration have been complied with and the memorandum so altered
shall be the Memorandum of Association of the company.
Question 80
Several small depositors of Overtrading Company Ltd., have made complaints about
non-refund of the deposits after due date. Explain briefly (1) the meaning of small
depositor and (2) the duty of the company after the default has taken place in the
matter of repayment of the deposits.
(May 2005)
Answer
Meaning of Small Depositor: According to Section 58AA of the Companies Act,
1956, a small depositor means a depositor who has deposited in a financial year a sum
not exceeding Rs. 20,000/- in a company and includes his successors, nominees and
legal representatives.
Duty of company in case of default in repayment of deposits: Every company
accepting deposits from small depositors should intimate the Company Law
Board/Tribunal within 60 days of the date of default the name and address of each
small depositor to whom it had defaulted in repayment of deposit or interest thereon.
Thereafter, the company should also give intimation to the Company Law Board/
Tribunal on a monthly basis.
Question 81
Explain briefly the meaning of sweat equity shares and the steps that a company has
to take for issue of such shares.
(May 2005)
Answer
Meaning of Sweat Equity Shares: According to Section 79A of the Companies Act,
1956, Sweat Equity Shares means equity shares issued by the company to employees
or directors at a discount or for consideration other than cash for providing know-how
or making available right in the nature of intellectual property rights or value additions
by whatever name called.
Steps for issue of Sweat Equity Shares: The company has to take the following
steps for issue of sweat equity shares:
(i) A special resolution is to be passed authorising the issue of sweat equity shares.
(ii) The special resolution should specify the number of shares, current market price,
consideration, if any, and the class or classes of directors or employees.
(iii) At least one year should have elapsed since the date on which the company was
entitled to commence business.
(iv) In the case of a listed company, the sweat equity shares can be issued in
accordance with the regulations made by SEBI in this behalf. In the case of unlisted
company, the shares are to be issued in accordance with the guidelines as may be
prescribed. (Unlisted companies issue of sweat equity share Rules, 2003).

CA-IPCC
Question 82
A company is required to pay dividend to its shareholders within 30 days of its
declaration. State the circumstances when a company will not be deemed to have
committed any offence even if it does not pay within 30 days.
(May 2005)
Answer
Section 207 of the Companies Act, 1956 provides for the following cases when failure
to pay dividend within 30 days of its declaration is not deemed to be an offence:
(i) Where dividend could not be paid due to operation of any law;
(ii) Where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with;
(iii) Where there is a dispute regarding the right to receive dividend;
(iv) Where the dividend has been lawfully adjusted by the company against any sum
due to it (company) from the shareholder; or
(v) Where for any reason, the failure to pay the dividend or to post the dividend
warrant within the period of 30 days from the date of declaration was not due to
any default on the part of the company.
Question 83
The Articles of Association of a private limited company contain provisions restricting
the right to transfer shares and limiting the number of members to fifty. What
restrictions are generally incorporated in the articles in restricting the right to transfer
shares? (May 2005)
Answer
The right of transfer of shares and limiting the number of members to 50 is generally
restricted in the following manner:
(i) By authorising the directors to refuse transfer of shares to persons whom they do
not approve or by compelling the shareholder to offer his shareholding to the
existing shareholders first. It may be noted that it can only restrict the right of sale
to a member. On this consideration, the articles usually provide that before selling
or transferring his share by the shareholder, the directors must be communicated in
writing of such intention of the shareholder.
(ii) By specifying the method for calculating the price at which the shares may be sold
by one member to another. Generally, it is left to be determined either by the
auditor of the company or by the company at a general meeting.
(iii) By providing that the shareholders who are employees of the company shall offer
the shares to specified persons or class of persons when they leave the company’s
service or from other sources in case of under-subscribed issues, within 60 days
from the date of closure of the issue, the company shall refund forthwith the
subscription amount in full without interest and with interest @15% p.a. if not paid
within 10 days after expiry of the said 60 days.
Question 84

CA-IPCC
State briefly the provisions relating to minimum subscription and consequence of non-
receipt of minimum subscription as per the Companies Act, 1956 and the provisions as
per SEBI guidelines. (May 2005)
Answer
In terms of Section 69(1) of the Companies Act, 1956 every prospectus for shares must
contain an indication as to the minimum amount which in the opinion of the Board of
directors must be raised. The amount so stated in the prospectus which shall be
reckoned exclusively of any amount otherwise than in money is referred to as the
‘minimum subscription’. The amount payable on application of each share shall not be
less than 5% of the nominal amount of the shares.
If the applications are not received by the company for such quantum of shares for
making minimum subscription within 120 days of the issue of prospectus, all moneys
received from the applicants for shares shall be repaid without interest. If such money
is not repaid within 130 days after the issue of prospectus, money will be repaid with
interest @6% p.a. after the expiry of 130 days.
POSITION AS PER SEBI GUIDELINES: As per SEBI guidelines, the minimum
subscription in respect of public and rights issue shall be 90% of the issue amount. The
requirement of 90% minimum subscription shall not be mandatory in case of offer for
sale of securities. In case of non-receipt by the company of 90% of the issued amount
from public subscription plus accepted development from underwriters or from other
sources in case of under-subscribed issues, within 60 days from the date of closure of
the issue, the company shall refund forthwith the subscription amount in full without
interest and with interest @15% p.a. if not paid within 10 days after expiry of the said
60 days.
Question 85
Write a note on the powers of the Central Government in regard to conversion of

debentures and loans into shares of the company under the following heads:
(i) When terms of issue of such debenture or terms of loan do not include term
providing for an option of conversion;
(ii) Matters considered in determining the terms and conditions of such conversion.
(iii) Remedy available to the company if conversion or terms of conversion is not
acceptable to it.
(May 2005)
Answer
(i) Under Section 81 of the Companies Act, 1956 where any debentures have been
issued to or loans have been obtained from the Government by a company,
whether such debentures have been issued or loans have obtained before or after
the commencement of Companies Amendment Act, 1963 (w.e.f. 1.1.1964), the
Central Government may, if in its opinion it is necessary in the public interest so to
do, by order direct that such debentures or loans or any part thereof shall be
converted into shares in the company on such terms and conditions as appear to

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that Government to be reasonable in the circumstances of the case, even if the
terms of issue of such debentures or the terms of such loans do not include term
providing for an option for such conversion.
(ii) In determining the terms and conditions of such conversion, the Central
Government shall have due regard to the following circumstances:
(i) The financial position of the company;
(ii) The terms of issue of the debentures or the terms of the loans, as the case may
be;
(iii) The rate of interest payable on the debentures or the loans;
(iv) The capital of the company, its loan liability, its reserves, its profits during the
preceding five years; and
(v) The current market price of the shares in the company.
A copy of every order proposed to be issued by the Central Government shall be
laid in draft before each House of Parliament.
The above powers of the Central Government are exercised notwithstanding
anything contained in sub-sections (1), (2) and (3) of Section 81 of the Companies
Act, 1956.
(iii) Remedies open to the company
If the terms and conditions of such conversion are not acceptable to the company,
the company may, within 30 days from the date of communication of such order or
within such further time as may be granted by the Court, prefer an appeal to the
court in regard to such terms and conditions and the decision of the Court on such
appeal and, subject only to such decision, the order of the Central Government
shall be final and conclusive
Question 86
State the procedure for passing a resolution by Postal Ballot. (May
2005)
Answer
A listed public company and in case of resolutions relating to such business as the
Central Government may, by notification, declare to be conducted only by postal ballot,
shall get any resolution passed by means of a postal ballot, instead of transacting the
business in general meeting of the company. The procedure laid down in Section 192A
is as under:
(i) Where a company decides to pass any resolution by resorting to postal ballot, it
shall send a notice to all the shareholders, along with a draft resolution explaining
the reasons therefore and requesting them to send their assent within a period of
30 days from the date of posting of the letter;
(ii) The notice shall be sent by registered post acknowledgement due or by any other
method as may be prescribed by the Central Government in this behalf, and shall
be annexed with the notice a postage pre-paid envelope for facilitating the
communication of the assent or dissent of the shareholder to the resolution within
the said period;
(iii) The board of directors shall appoint one scrutinizer, who is not in employment of
the company, may be a retired judge or any person of repute, who, in the opinion of

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the board can conduct the postal ballot voting process in a fair and transparent
manner;
(iv) The scrutinizer will be in position for 35 days (excluding holidays) from the date of
issue of notice for annual general meeting. He is required to submit his final report
on or before the said period.
(v) If a resolution is assented to by a requisite majority of the shareholders by means
of postal ballot, it shall be deemed to have been passed at a general meeting
convened in that behalf.
For this purpose the scrutinizer willing to be appointed is available at the registered
office of the company for ascertaining the requisite majority.
(vi) If a shareholder sends his assent or dissent in writing on a postal ballot and
thereafter any person fraudulently defences or destroys the ballot paper or
declaration of the identity of shareholder, such person shall be punishable with
imprisonment for a term which may extend to six months or with fine or both;
(vii) The scrutinizer shall maintain a register to record the consent received, including
electronic media, mentioning the particulars of name, address, folio number,
number of shares, nominal value of shares, whether the shares have voting,
differential voting or non-rights and the scrutinizer shall also maintain record for
postal ballot which are received in defaced or mutilated form. The postal ballot and
all other papers relating to postal ballot will be under the safe custody of the
scrutinizer till the Chairman considers, approves and signs the minutes of the
meeting. Thereafter, the scrutinizer shall return the ballot papers and other related
papers/register to the company so as to preserve such ballot papers and other
related papers/registers safely till the resolution is given effect to.
As per the Explanation, ‘Postal Ballot’ includes voting by electronic mode.
Question 87
State what is meant by “Quorum” and when does quorum be considered immaterial
under the provisions of the Companies Act, 1956. (May
2005)
Answer
Quorum means the minimum number of members that must be present in order to
constitute a meeting and transact business thereat. Thus quorum represents the
number of members on whose presence the meeting of a company can commence its
deliberations. Under the articles provide for a larger number, 5 members personally
present in the case of a public company (other than a public company which became
public by virtue of Section 43A, now deleted) and 2 members in case of a private
company constitute the quorum for a general meeting as given in Section 174 of the
Companies Act, 1956. The words ‘personally present’ excludes proxies. However, the
representative of a body corporate appointed under Section 187 or the representative
of the President or Governor of a State appointed under Section 187A is a member
personally present for the purpose of counting quorum.
If all the members are present, it is immaterial that the quorum required is more than
the total number of members. If for example, the articles of a private company provide
that 4 members personally present shall be a quorum and the number of members is
reduced to 3, the question of quorum will not arise when all the 3 members attend the
meeting.

CA-IPCC
Question 88
State the provisions of the Companies Act regarding calling and holding an
extraordinary general meeting with respect to:
(i) Number of members entitled to requisition a meeting.
(ii) Power of the tribunal to order meeting to be called under Section 186.
(May 2005)
Answer
(i) Number of members entitled to requisition an extraordinary general
meeting:
(a) in the case of a company having a share capital, such number of members
who hold at the date of requisition, not less than 1/10 th of such of the paid up
capital of the company as at that date carries the right of voting in regard to
that matter;
(b) in the case of a company not having a share capital, such number of
members who have at the date of deposit of requisition not less than 1/10 th of
the total voting power of all the members having at the said date a right to vote
in regard to that matter.
(ii) Power of Tribunal to order meeting to be called under Section 186:
If for any reason it is impractical to call a meeting, other than an annual general
meeting, in any manner in which meetings of the company may be called, or hold
or conduct the meeting of the company in the manner prescribed by the Act or the
articles, the Tribunal may, either on its own motion or on the requisition of:
(a) any director of the company or (b) of any member of the company who would
be entitled to vote at the meeting:
(b) Order a meeting of the company to be called, held and conducted in such
manner as the Tribunal thinks fit; and
(c) Give such ancillary or consequential directions as the Tribunal thinks expedient,
including directions modifying, or supplementing in relation to the calling
holding and conducting of the meeting, the operations of the provisions of the
Companies Act, 1956 and of the company’s articles. The Tribunal may give
direction that one member present in person or by proxy shall be deemed to
constitute a meeting with such order shall, for all purposes, be deemed to be a
meeting of the company duly called, held and conducted.
Question 89
The minutes of the meeting must contain fair and correct summary of the proceedings
thereat. Can the Chairman direct exclusion of any matter from the minutes? Some of
the shareholders insist on inclusion of certain matters which are regarded as
defamatory of a Director of the company. The Chairman declines to do so. State how
the matter can be resolved.
(May 2005)
Answer

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Under Section 193(5) of the Companies Act, 1956 any matter which in the opinion of
the Chairman of the meeting:
(i) is or could reasonably be regarded as defamatory of any person;
(ii) is irrelevant or immaterial to the proceedings, or
(iii) is detrimental to the interests of the company,
the Chairman shall exercise an absolute discretion in regard to the inclusion or non-
inclusion of any matter in the minutes on the grounds specified above.
Since the Chairman has absolute discretion on the inclusion or exclusion of any matter
in the minutes, the insistence of the shareholders will be of no avail.
Question 90
Distinguish between ‘share warrant’ and ‘share certificate’. State whether a private
company can issue share warrants.
(November 2005)
Answer
Share certificate and Share Warrant:
(1) A share certificate is a prima facie evidence of document of title, stating that the
holder is entitled to specified number of shares. Share warrant is a bearer
document stating that the holder is entitled to certain number of shares specified
therein.
(2) The holder of a share certificate is a member of the company, but whereas the
bearer of a share warrant can be a member only if the articles provide.
(3) A share warrant is a negotiable instrument, where as a share certificate is not so.
(4) A public company can only issue a share warrant, whereas, a share certificate can
be issued by a public and private company.
(5) In order to qualify as a director, the person should acquire a share certificate
instead of a share warrant.
(6) A share certificate can be issued for a fully paid and partly paid up shares. A share
warrant can be issued in respect of only full paid up share.
Private Company issuing Share Warrant:
A Private Company cannot issue share warrant under the provisions of the Company
Act, 1956.
Question 91
When is a company required to issue a ‘shelf prospectus’ under the provisions of the
Companies (Amendment) Act, 2000? Explain the provisions of the Act relating to the
issue of ‘shelf prospectus’ and filing it with the Registrar of Companies.
(November 2005)
Answer
Meaning: According to Section 60A as inserted by the Companies (Amendment) Act,
2000 ‘Shelf Prospectus’ means a prospectus issued by any Financial Institutions or
bank for one or more issues of the Securities or class of securities specified in that
prospectus.

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Organization required to issue and file Shelf Prospectus: Any Public Financial
Institution, a public sector bank or schedule bank whose main object is financing, shall
file a shelf prospectus. ‘Financing Means Making loans to or subscribing in the capital
of, a private industrial enterprise engaged in infrastructure financing, or such, other
company as the Central Government may notify in this behalf.
A company filing a shelf prospectus with the registrar shall not be required to file
prospectus afresh at every stage of offer of securities by it within a period of validity of
such shelf prospectus. It shall be required to file an information memorandum on all
material facts relating to new charges created, changes in the financial position as
have occurred between the first offer of securities, previous offer of securities and the
succeeding offer of securities within the time prescribed by the Central Government
prior to making of a second or subsequent offer of securities under the shelf
prospectus.
An information memorandum shall be issued to the public along with shelf prospectus
filed at the stage of the First offer of securities and such prospectus shall be valid for a
period of one year from the date of opening of the first issue securities under that
prospectus.
Where an update of information memorandum is filed every time on offer of securities
is made, such memorandum together with the shelf prospectus shall constitute the
prospectus.
Question 92
Dev Limited issued a notice for holding of its Annual General Meeting on 7 th November,
2005. The notice was posted to the members on 16.10.2005. Some members of the
company allege that the company had not complied with the provisions of the
Companies Act, 1956 with regard to the period of notice and as such the meeting was
not validly called. Referring to the provisions of the Act, decide:
(i) Whether the meeting has been validly called?
(ii) If there is a short fall in the number of days by which the notice falls short of the
statutory requirement, state and explain by how many days does the notice fall
short of the statutory requirement?
(iii) Can the short fall, if any, be condoned? (November 2005)
Answer
(i) 21 Days clear notice of an AGM must be given [Section 171, Companies Act, 1956]:
In case of notice by post, section 53(2) provides that the notice shall be deemed to
have been received on expiry of 48 hours from the time of its posting. Besides, for
working out clear 21 days, the day of the notice and the day of the meeting shall be
excluded. Accordingly, 21 clear days notice has not been served (only 19 clear
days notice is served) and the meeting is, therefore, not validly convened.
(ii) worked as per (i) above, notice falls short by 2 days.
(iii) according to Section 171(2), on AGM called at a notice shorter than 21 clear days
shall be valid if consent is accorded thereto by all the members entitled to vote
thereat. Thus, if all the members of the company approve the shorter notice,
shortfall may be condoned.
Question 93

CA-IPCC
XYZ Limited realised on 3 November, 2005 that particulars of charge created on 11th
rd
September, 2005 in favour of a bank were not filed with the Registrar of Companies for
registration. What procedure should the company follow to get the charge registered
with the Registrar of Companies? Would the procedure be different if the charge was
created on 11th August, 2005 instead of 11th September, 2005? Explain with reference
to the relevant provisions of the Companies Act, 1956.
(November 2005)
Answer
Section 125(1) of the Companies Act, 1956 provides that the prescribed particulars of
the charge together with the instrument of any, by which the charge is created or
evidenced, or a copy thereof, shall be filed with the Registrar within 30 days after the
date of the creation of charge. In the given case particulars of charge have not been
filed within the prescribed period of 30 days of its creation.
However, the Registrar of Companies is empowered under the proviso to Section
125(1) to extend the period of 30 days by another 30 days on payment of such
additional fee not exceeding 10 times the amount of fee specified in Schedule X as the
registrar may determine. Taking advantage of this provision, XYZ Limited should
immediately file the particulars of charge with the Registrar and satisfy the Registrar
that it had sufficient cause for not filing the particulars of charge within 30 days of
creation of charge.
If the charge was created on 11th August, 2005, then the company has to apply to the
Company Law Board u/s 141 (now Tribunal) and seek extension of time for filing the
particulars for registration. The company must satisfy the Company Law Board (now
Tribunal).
(a) that the omission was accidental or due to inadvertence or due to some other
sufficient cause or was not of the nature of prejudice the position of creditors or
shareholders of the company or.
(b) that it is just and equitable to grant relief on other grounds. On such
satisfaction, the Company Law Board (now Tribunal) may extend the time for
registration of charge on such terms and conditions as it may think expedient.
Once the time is extended and it is made out that the particulars have been filed
within the extended time, the Registrar is bound to register the charge.
Question 94
“Every shareholder of a company is also known as a member, while every member may
not be known as a shareholder.” Examine the validity of the statement and point out
the distinction between a ‘member’ and a ‘shareholder’.
(November 2005)
Answer
‘Member’ or ‘Shareholders’ of a company are the persons who collectively constitute

the company as a corporate. Entry, the terms ‘Member’ and ‘Shareholder’ and ‘holder
of a share’ are used interchangeable. (Balkrishan Gupta v. Swadeshi Polytex Ltd.)
They are synonymous in the case of a company limited by shares, a company limited
by guarantee and having a share capital and on unlimited company whose capital is
held in definite shares. But in the case of an unlimited company or a company limited

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by guarantee, a Member may not be a shareholder, for such a company may not have
a share capital.
A shareholder may be distinguished from a Member as follows:
(1) A registered shareholder is a member but a registered member may not be a
shareholder because the company may not have a share capital.
(2) A person who owns a bearer share warrant is a shareholder but he is not a member
as his name is struck off the register of members. [Section 115(i)]. This means
that a person can be a holder of shares without being a member.
(3) A legal Representative of a deceased Member is not a member until he applies for
registration. He is, however, a shareholder even though his name does not appear
on the register of members.
(4) A person who subscribes to the Memorandum of Association immediately becomes
the member, even though no shares are allotted to him. Till shares are allotted to
the subscriber, he is a member but not a shareholder of the company.
(5) A person who has transferred his shares ceases to be a holder of those shares from
the date of the transfer, but he continues to be a member till such time the transfer
is registered in the name of the transfers in the books of the company.
Question 95
M/s India Computers Ltd. was registered as a Public Company on 1 st July, 2005 in the
State of Maharashtra. Another company by name M/s All India Computers Ltd. was
registered in Delhi on 15th July, 2005. The promoters of India Computers Ltd. have
failed to persuade the management of All India Computers Ltd. to change the
company’s name, as it closely resembles with the name of the first registered
company.
Advise the Management of India Computers Ltd. about the remedies available to them
under the provisions of the Companies Act, 1956.
(November 2005)
Answer
Since the name of M/s India Computer Ltd., was registered earlier, on 1st July, 2005, the
promoters have a right to ask the management of M/s All India Computers Ltd to
change its name suitably as the said name closely resembles with that of the first
registered company. Since the management of M/s All India Computers Ltd has not
agreed, the promoters of India computers Ltd can approach the Central Government
under Section 22 of the Companies Act, 1956 for rectification of the name of the
company registered subsequently. The Central Government can direct the second
registered company for correction. This direction can be given within 12 months from
the date of registration of the latter company and the said company has to comply with
the direction within 3 months by changing its name suitably failing which penal
provisions will become applicable. The power of the Central Government under Section
22 has been delegated to the Regional Director.
Question 96
State the procedure for inspection of Minutes Book of General Meetings of a company,
by the members. (November 2005)
Answer

CA-IPCC
Inspection of Minutes Books of General Meetings: Following are the provisions relating
to the procedure for inspection of minutes books of general meetings of a company by
the members:
(1) The books containing the Minutes of the proceedings of any general meeting of a
company shall-
(a) be kept at the registered office of the company, and
(b) be open, during business hours, to the inspection of any member without
charge, subject to such reasonable restrictions as the company may, by its
articles or in general meeting impose, so however that not less than two
hours in each day are allowed for inspection.
(2) Any member shall be entitled to be furnished, within seven days after he has made
a required in that behalf to the company, with a copy of any minutes referred to in
sub-section (1), on payment of such sum as may be prescribed for every one
hundred words or fractional part thereof required to be copied.
(3) If any inspection required under sub-section (1) is refused, or if any copy required
under sub-section (2) is not furnished within the time specified therein, the
company, and every officer of the company who is in default, shall be punishable
with fine which may extend to five thousand rupees in respect of each offence.
(4) In the case of any such refusal or default, the Central Government may, by order,
compel on immediate inspection of the Minute books or direct that the copy
required shall forthwith be sent to the person requiring it.
Question 97
“Moonstar Ltd” is authorised by its articles to accept the whole or any part of the
amount of remaining unpaid calls from any member although no part of that amount
has been called up. ‘A’, a shareholder of the Moonstar Ltd., deposits in advance the
remaining amount due on his shares without any calls made by “Moonstar Ltd.”.
Referring to the provisions of the Companies Act, 1956, state the rights and liabilities
of Mr. A, which will arise on the payment of calls made in advance.
(November 2005)
Answer
Mr.. A, a shareholder of the ‘Moon Star Ltd’., deposited in Advance the remaining
amount due on his shares without any calls made by ‘Moon Star Ltd’. ‘Moon Star Ltd’
was authorized to accept the unpaid calls by its articles. According to section 92(1) of
the Companies Act, 1956, a company may, if so authorized by the articles, accept from
any member the whole or a part of the amount remaining unpaid or any shares by him
although no part of that amount has been called up. The amount so received or
accepted is described as payment in advance of calls. When a company receives
payment in advance of calls, the rights and liabilities of the shareholder will be as
follows:
(i) The shareholder is not entitled to voting rights in respect of the moneys so paid by
him until the same would, but for such payment become presently payable.
[Section 92(2)].
(ii) The shareholder’s liability to the company in respect of the call for which the
amount is paid is distinguished.

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(iii) The shareholder is entitled to claim interest on the amount of the call to the extent
payable according to the articles of association. If there are no profits, it must be
paid out of capital, because shareholder becomes the creditor of the company in
respect of this amount.
(iv) The amount received in advance of calls is not refundable.
(v) In the event of winding up the shareholder ranks after the creditors, but must be
paid his amount with interest, if any before the other shareholders are paid off.
(vi) The power to receive the payment in advance of calls must be exercised in the
general interest and for the benefit of the company.
Question 98
C, a member of LS & Co. Ltd., holding some shares in his own name on which Final call
money has not been paid, is denied by the company voting right at a general meeting
on the ground that the articles of association do not permit a member to vote if he has
not paid the calls on the shares held by him.
With reference to the provisions of the Companies Act, 1956, examine the validity of
company’s denial to C of his voting right.
(November 2005)
Answer
Section 181 of the Companies Act, 1956 lays down the grounds on which right of a
shareholder to vote at the general meeting may be excluded. These are:
(a) Non-payment of calls by a member;
(b) Non-payment of other sums due against a member;
(c) Where company has exercised the right of lien on his shares.
Since the stipulation in the Articles relates to one of the grounds permitted under
Section 181, the same is valid C’s protest is not valid.
Question 99
In what way does the Companies Act, 1956 regulate the payment of ‘underwriting
commission’? Explain the provisions of the Act, state the conditions to be complied
with before payment of such commission can be made to underwriters of the company.
(November
2005)
Answer
Payment of underwriting commission is regulated by the provisions of Companies Act,
1956 stating certain conditions as contained in Section 76. The conditions to be
fulfilled are:
(i) The payment of commission should be authorized by the articles.
(ii) The names and addresses of the underwriters and the number of shares or
sdebentures underwriter by each of them should be disclosed in the prospectus.
(iii) The amount of commission should not exceed, in the case of shares, 5% of the
price at which the shares have been issued or the amount or rate authorized by the
articles, whichever is less and in the case of debentures it should not exceed 2½%.

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(iv) The rate should be disclosed in the prospectus, or in the statement in lieu of
prospectus (or in a statement in prescribed form signed in the like manner as the
statement in the lieu of prospectus) and should be filed with the Registrar along
with a copy of the underwriting contract before the payment of the commission.
(v) The number of shares or debentures, which persons have agreed to subscribe
absolutely or conditionally for commission, should be disclosed in the manner
aforesaid.
(vi) A copy of the contract for the payment of the commission should be delivered to
the Registrar along with the prospectus or the statement in lieu of prospectus for
registration.
Section 76(4A) clarifies that commission to the underwriter is payable only in respect of
those shares or debentures which are offered to the public for subscription. However,
where, (i) a person, who for a commission has subscribed (or agreed to subscribe) for
shares or debentures of a company and before the issue of the prospectus (or
statement in lieu of prospectus) for such shares or debentures, some other person (or
persons) has subscribed for any or all of them, and (ii) such a fact together with the
aggregate amount of commission payable to the underwriter is disclosed in such
prospectus (or statement in lieu of prospectus), then the company may pay
commission to the underwriter in respect of his subscription irrespective of the fact
that the shares or debentures have already been subscribed.
Question 100
At a General meeting of a company, a matter was to be passed by a special resolution.
Out of 40 members present, 20 voted in favour of the resolution, 5 voted against it and
5 votes were found invalid. The remaining 10 members abstained from voting. The
Chairman of the meeting declared the resolution as passed.
With reference to the provisions of the Companies Act, 1956, examine the validity of
the Chairman’s declaration.
(November 2005)
Answer
Under Section 189(2) of the Companies Act, 1956, for a valid special resolution, the
following conditions need to be satisfied:
(i) The intention to propose the resolution, as a special resolution must have been
specified in the notice calling the general meeting or other intimation given to the
members;
(ii) The notice required under the Companies Act must have been duly given of the
general meeting;
(iii) The votes cast in favour of the resolution (whether by show of hands or on poll) by
members present in person or by proxy are not less than 3 times the number of
votes, if any, cast against the resolution.
Thus, in terms of the requisite majority, votes cast in favour have to be compared with
votes cast against the resolution. Abstentions or in valued, if any, are not to be taken
into account. Accordingly, in the given problem, the votes cast in favour (20) being
more than 3 times of the votes cast against (5), if other conditions of Section 189(2)
are satisfied, the decision of the Chairman is in order.

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Question101
Mars India Ltd. owed to Sunil Rs. 1,000. On becoming this debt payable, the company
offered Sunil 10 shares of Rs. 100 each in full settlement of the debt. The said shares
were fully paid and were allotted to Sunil.
Examine the validity of theses allotment in the light of the provisions of the Companies
Act, 1956. (November 2005)
Answer
Allotment of Shares: As per the Section 75 of the Companies Act, 1956 when shares
are allowed to a person by a company, payment may be made – (i) in cash, or (ii) in
kind (with the consent of the company).
‘Cash’ here does not necessarily mean the current coin of the country. It means “such
transaction as would in an action at law for calls, support a plea of payment.”
On the basis of the above provision and decision of the related case Coregam Gold
Mining Co. of India V. Roper, (1892), A.C. 125, the allotment of fully paid up shares in
full satisfaction of Sunil’s debt is valid.
Question 102
What is the meaning of “Certificate of Incorporation” under the provisions of the
Companies Act, 1956?
(November 2005)
Answer
Certificate of incorporation: Upon the registration of the documents
required for registration of a proposed company and filed by such company
along with the necessary fee, the Registrar of Companies issues a certificate
that the company is incorporated and in the case of a limited company, that it
is limited (Section 34 of the Companies Act, 1956).
Section 35 provides that the certificate of incorporation given by the Registrar
in respect of all the requirements of this Act have been complied with in respect
of registration and matters precedent and incidental thereto, and that the
association is a company authorized to be registered and duly registered under
this Act. A certificate of incorporation is conclusive as to all administrative acts
relating to incorporation and as to the date of incorporation (Jubilee Cotton
Mills vs. Leuris)
Commencement of Business: A private company can commence its business
as soon as it gets certificate of incorporation. But a company having a share
capital which has issued a prospectus inviting the public to subscribe for its
shares cannot commence any business or exercise borrowing power unless:
(a) The minimum number of shares which have to be paid for in cash has been
subscribed and allotted.
(b) Every director has paid, in respect of share for which he is bound to pay an amount
equal to what is payable on shares offered to the public on application and
allotment.

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(c) No money is or may become liable to be paid to application of any shares or
debentures offered for public subscription by reason of any failure to apply for or to
obtain permission for the shares or debentures to be dealt in any recognised stock
exchange; and
(d) A statutory declaration by the secretary or one of the directors that the aforesaid
requirements have been complied with is filed with the Registrar.
If, however, a company having a share capital has not issued a prospectus
inviting the public to subscribe for its shares, it cannot commence any business
or exercise borrowing powers unless it has issued a statement in lieu of
prospectus and the conditions contained in paragraph (b) and (d) aforesaid
have been complied with.
The Registrar of Companies shall examine them and if satisfied, shall issue to the
company a certificate to commence business.
Question 103
What are the provisions relating to “Information Memorandum” contained in
Section60B of the Companies Act, 1956 [inserted by the Companies (Amendment) Act,
2000]? (May 2006)
Answer
Information Memorandum: Section 60B of the Companies Act, 1956 (inserted
by the Companies Amendment Act, 2000) provides the following regarding
information memorandum:
1. A public company making an issue of securities may circulate information
memorandum to the public prior to filing of a prospectus.
2. A company inviting subscription by an information memorandum shall be bound to
file a prospectus prior to the opening of the subscription lists and the offer as a red-
herring prospectus, at least three days before the opening of the offer.
3. The information memorandum and red-herring prospectus shall carry same
obligations as are applicable in the case of a prospectus.
4. Any variation between the information memorandum and the red-herring
prospectus shall be highlighted as variations by the issuing company.
Explanation – For the purposes of Sub-sections (2), (3) and (4), “red-herring
prospectus’ means a prospectus which does not have complete particulars on the
price of the securities offered and the quantum of securities offered.
5. Every variation as made and highlighted in accordance with sub-section (4) above
shall be individually intimated to the persons invited to subscribe to the issue of
securities.
6. In the event of the issuing company or the underwriters to the issue have invited or
received advance subscription by way of cash or post-dated cheques or stock-
invest, the company or such underwriters or bankers to the issue shall not encash
such subscription moneys or post-dated cheques or stock invest before the date of
opening of the issue, without having individually intimated the prospective
subscribers of the variation and without having offered an opportunity to such
prospective subscribers to withdraw their application and cancel their post-dated
cheques or stock-invest or return of subscription paid.

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7. The applicant or proposed subscriber shall exercise his right to withdraw from the
application on any intimation of variation within seven days from the date of such
intimation and shall indicate such withdrawal in writing to the company and the
underwriters.
8. Any application for subscription which is acted upon by the company or
underwriters or bankers to the issue without having given enough information of
any variations, or the particulars of withdrawing of offer or opportunity for
cancelling the post-dated cheques or stock invest or stop payments for such
payments shall be void and the applicants shall be entitled to receive a refund, or
return of its post-dated cheques or stock-invest or subscription monies or
cancellation of its application, as if the said application had never been made and
the applicants are entitled to receive back their original application and interest at
the rate of fifteen per cent from the date of encashment till payment of realisation.
9. Upon the closing of the offer of securities, a final prospectus stating therein the
total capital raised whether by way, of debt or share capital and the closing price of
the securities and any other details as were not complete in the red-herring
prospectus shall be filed in a case of a listed public company with the Securities
and Exchange Board and Registrar, and in any other case with the Registrar only.
Question 104
The Directors of “Sunrise Computers Ltd.” desire to change the Company’s
name to “Royal Computers Ltd.” and seek your advice. Explain the procedure
to be followed, for the said purpose, under the Companies Act, 1956.
(May 2006)
Answer
Change of name of the company: ‘Sunrise Computers Ltd.’ may change its name to
‘Royal Computers Ltd.’ as per section 21 of the Companies Act, 1956.
A company may by special resolution, and with the approval of the Central
Government, signified in writing, change its name [Section 21]. Power under Section
21 has been delegated to the Registrar of Companies vide notification GSR 507(E)
dated 24-6-85]. The application for change of name is required to pay a fee of Rs. 500/-
to ascertain whether the proposed name is available and thereafter pass the required
special resolution and thereafter submit the necessary documents to the Registrar. If
the Registrar is satisfied that the relevant procedures have been complied with by the
Company, in this regard, the Registrar shall issue fresh certificate with the change
embodied therein. The change in name shall not affect any of the company’s rights or
obligations of the company or render any legal proceedings by / or against it. Any legal
proceedings which might have been continued or commenced by or against the
company by its former name may be continued by its new name [Section 23].
Question 105
Explain the meaning of “transmission of Shares” under the Companies Act,
1956. In what ways is “transmission of shares” different from “Transfer of
Shares”? (May 2006)
Answer

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Transmission and transfer of shares: Under Section 109B of the Companies Act,
1956, transmission of shares takes place when shares are transferred under the
operation of law, either on the death of the registered shareholder or on his being
adjudged as insolvent. It also takes place where the holder is a company if it goes into
liquidation. Upon the death, the shares of the deceased vest in his executors or
administrators and the estate becomes liable for calls if the shares are not fully paid
up. In the like manner the official assignee or the receiver, as the case may be, is also
entitled to be registered as a member in the place of shareholder who has been
adjudged as insolvent [R. W. Key and Sons (1902) IC, 467]. However, the
executors or administrators may decline to be registered as members for various
reasons. In that event the legal representatives, by virtue of Section 109, shall be
entitled to transfer the shares of the deceased irrespective of whether they are partly
paid or fully paid. Similarly, the official assignee has the statutory power to transfer
the shares under Section 58(1) of the Presidency Towns Insolvency Act.
Distinction between transfer and transmission of shares
Transfer of shares Transmission of shares
1. It is affected by a 1. It takes place by
voluntary/deliberate act operation of law e.g. due
of the parties. to death, insolvency or
lunacy of a member.
2. It takes place for 2. No consideration is
consideration. involved.
3. The transferor has to 3. There is no prescribed
execute a valid instrument of transfer.
instrument of transfer.
4. As soon as the transfer is 4. Shares continue to be
complete, the liability of subject to the original
the transferor ceases. liabilities.
Question 106
The Registrar of Companies on examining the statutory report filed with him by M/s
Jyothi Company Ltd., finds that the report has been certified as correct, by all the
directors of the Company, except the Managing Director. The Registrar refuses to
register the said document on the ground that it was not signed by the Managing
Director of the Company.
Answer the following in the light of the Companies Act, 1956:
(i) Whether the Registrar of Companies can hold the officers of the Company liable?
(ii) What provisions of the Companies Act have not been complied with by the
company and its officers?
(iii) To what penalties are the Company and its officers liable? (May 2006)
Answer
FILING REPORT WITHOUT SIGNATURE:
(i) Yes, the Registrar can hold the officers of the company liable.

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(ii) Section 165(4) of the Companies Act, 1956 requires the statutory report to be
certified as correct by at least two directors of the company one of whom must be a
managing director, where there is one. Thus, the aforesaid provision of Section
165(4) has not been complied with.
(iii) Sub –Section (9) of Section 165 provides for penalties for non-compliance of Sub-
section (4). It makes every director or other officer of the Company who is in
default punishable with fine upto Rs. 5,000/-.
Question 107
To remove the Managing Director, 40% members of Global Ltd. submitted requisition
for holding extra-ordinary general meeting. The company failed to call the said
meeting and hence the requisitionists held the meeting. Since the Managing Director
did not allow the holding of meeting at the registered office of the Company, the said
meeting was held at some other place and a resolution for removal of the Managing
Director was passed.
Examine the validity of the said meeting and resolution passed therein in the light of
the companies Act, 1956. (May
2006)
Answer
Extraordinary meeting: Every shareholder of a company has a right to requisition for
an extraordinary general meeting. He is not bound to disclose the reasons for the
resolution to be proposed at the meeting [Life Insurance Corporation of India vs.
Escorts Ltd., (1986) 59 Comp. Cas. 548].
Section 169 of the companies Act contains provisions regarding holding of
extraordinary general meetings. It provides that if directors fail to call a properly
requisitioned meeting, the requisitionists or such of the requisitionists as represent not
less than 1/10th of the total voting rights of all the members (or a majority of them)
may call a meeting to be held on a date fixed within 3 months of the date of the
requisition.
Where a meeting is called by the requisitionists and the registered office is not made
available to them, it was decided in R. Chettiar v. M. Chettiar that the meeting may be
held any where else.
Further, resolutions properly passed at such a meeting, are binding on the company.
Thus, in the given case, since all the above mentioned provisions are duly complied
with. Hence the meeting with the resolution removing the managing director shall be
valid.
Question 108
What do you understand by “Charge” under the Companies Act, 1956? Distinguish
between “fixed Charge” and “Floating charge”.
(May 2006)
Answer
Charge: The term ‘charge’ has not been adequately defined in the Companies
Act, 1956 except that section 124 provides that the expression charge shall

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include a mortgage. However, it can be understood that where in transaction
for value, both parties evidence the intention that property existing or future
shall be made available as security for the payment of a debt and that the
creditor/mortgage shall have a pleasant right to have it made available, there is
a charge.
Distinction between fixed charge and floating charge:
Fixed charge Floating charge
1. It is a legal charge. 1 It is an equitable charge.
.
2. It is a charge on specific, 2 It is a charge on present
ascertained and existing . and future assets. No
asset. specific assets.
3. Company cannot deal 3 Company is free to use or
with the assets except . deal with the assets the
with the consent of the way it likes until the charge
charge holder. becomes fixed.
4. Registration of fixed 4 Registration of all floating
charge on movable assets . charge on all kinds of
is not compulsory. assets is compulsory by
law.
5. Fixed charge has always 5 Ambulatory and shifting in
priority over floating . character.
charge.
Question 109
The Articles of Association of X Ltd. require the personal presence of 7 members to
constitute quorum of General Meetings. The following persons were present in the
extra-ordinary meeting to consider the appointment of Managing Director:
(i) A, the representative of Governor of Madhya Pradesh.
(ii) B and C, shareholders of preference shares,
(iii) D, representing Y Ltd. and Z Ltd.
(iv) E, F, G and H as proxies of shareholders.
Can it be said that the quorum was present in the meeting? (May
2006)
Answer
Quorum: In this case the quorum for a general meeting is 7 members to be
personally present. For the purpose of quorum, only those members are
counted who are entitled to vote on resolution proposed to be passed in the
meeting.
Again, only members present in person and not by proxy are to be counted.
Hence, proxies whether they are members or not will have to be excluded for
the purposes of quorum.

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If a company is a member of another company, it may authorize a person by
resolution to act as its representative at a meeting of a latter company, then
such a person shall be deemed to be a member present in person and counted
for the purpose of quorum (Section 187)
Where two or more companies which are members of another company, appoint
a single person as their representative then each such company will be counted
as quorum at a meeting of the latter company.
Again Section 187A of the Companies Act, 1956 provides that the President of
India or Governor of a State, if he is a member of a company, may appoint such
a person as he thinks fit, to act as its representative at any meeting of the
company. A person so appointed shall be deemed to be a member of such a
company and thus considered as member personally present.
In view of the above there are only three members personally present.
‘A’ will be included for the purpose of quorum. B & C have to be excluded for
the purpose of quorum because they represent the preference shares and since
the agenda being the appointment of Managing Director, their rights cannot be
said to be directly affected and therefore, they shall not have voting rights. D
will have two votes for the purpose of quorum as he represents two companies ‘
Y Ltd.’ and ‘Z Ltd.’ E, F, G and H are not to be included as they are not
members but representing as proxies for the members.
Thus it can be said that the requirements of quorum being 7, 3 members
personally present shall not constitute a valid quorum for the meeting.
Question 110
A Company served a notice of General Meeting upon its members. The notice stated
that a resolution to increase the share capital of the Company would be considered at
such meeting. A shareholder complaints that the amount of the proposed increase was
not specified in the notice. Is the notice valid?
(May 2006)
Answer
Notice of Meeting: Section 173 of the Companies Act, 1956 requires a
company to annex an explanatory statement to every notice for a meeting of
company, at which some ‘special business’ is to be transacted. This
explanatory statement is to bring to the notice of members all material facts
relating to each item of special business. Section 173 further specifies that all
business in case of any meeting other than the annual general meeting is
regarded as special business. Thus, the objection of the shareholder is valid
since the details on the item to be considered are lacking. The information
about the amount is a material fact with reference to the proposed increase of
share capital. The notice is, therefore, not a valid notice under Section 173 of
the Companies Act, 1956.
Question 111

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Answer the following in relation to the provisions of the Companies Act, 1956:
(i) Can the declaration of Board of Directors of interim dividend be revoked?
(ii) Who is empowered to declare final dividend ? (May
2006)
Answer
(i) Till the passing of the Companies (Amendment) Act, 2000, there was no provision in
the Companies Act (except reg. 86 of Table A) relating to interim dividend. The
Companies (Amendment) Act, 2000 has introduced sub-section (14A) in section 2
whereby ‘interim dividend’ is now part of ‘dividend’ and accordingly all provisions
of the Companies Act relating to ‘dividends’ have become applicable to ‘interim
dividend’ also.
To put things beyond doubt, section 205 ha also been amended to provide for the
following:
♦ The Board of Directors may declare interim dividend and the amount of
dividend including interim dividend shall be deposited in a separate bank
account within five days from the date of declaration of such dividend.
♦ The amount of dividend including interim dividend so deposited above shall be
used for payment of interim dividend.
♦ The provisions contained in sections 205, 205A, 205C, 206, 206A and 207, as
far as may be, also apply to any interim dividend.
Another view is there that the decision on interim dividend can be revoked only before
transfer of the amount to the separate bank account pursuant to section 205(1A) of the
Act. Further, according to Secretarial Standard 3 of the ICSI, interim dividend once
declared cannot be revoked. A judicial decision in this regard can only remove the
confusion.
Accordingly, it seems that the interim dividend, like final dividend, should be considered
as a debt due and thus cannot be revoked.
Question 112
The principal business of XYZ Company Ltd. was the acquisition of vacant plots of land
and to erect the houses. In the course of transacting the business, the Chairman of the
Company acquired the knowledge of arranging finance for the development of land.
The XYZ Company introduced a financier to another company ABC Ltd. and received an
agreed fee of Rs. 2 lakhs for arranging the finance. The Memorandum of Association of
the company aurhorises the company to carry on any other trade or business which can
in the opinion of the board of directors, be advantageously carried on by the company
in connection with the company’s general business. referring to the provisions of the
Companies Act, 1956 examine the validity of the contract carried out by XYZ Company
ltd. with ABC L (November 2006)
Answer
Under the provision of Companies Act, 1956 as contained in Section 17(1) a company is
permitted to alter the objects to carry on some business which come under the existing

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circumstances may conveniently advantageously be combined with the existing law of
the company.
In the light of the clause in the Memorandum of Association of the company which
authorizes the company to carry on any other trade or business which can, in the
opinion of the board of directors, be advantageously carried on by the company in
connection with the general business. Since the directors honestly believes that the
transaction could be advantageously carried on an ancillary to the company’s main
objects, therefore, it was not ultra vires. (Bell Houses ltd. Vs. City Wall Properties Ltd.)
Question 113
Explain the Provisions of Companies Act, 1956 relating to the establishment of Investor
Education and Protection Fund. (November 2006)
Answer
Investor Education and Protection Fund (Section 205C)
Companies Act, 1956 vide Section 205C provides for the establishment of Investor
Education and Protection Fund. There shall be credited to the fund the following
accounts:
(i) Amounts in the unpaid dividend of the company’s unclaimed for 7 years.
(ii) The application money received by companies for allotment of any securities and
due forefund.
(iii) Matured deposits with companies.
(iv) Matured debentures with companies.
(v) Interest accrued on the amount stated in (i) to (iv) above.
(vi) Grants and donations given to the fund by the Central Government / State
Government, companies or any other institutions for the purposes of the fund; and
(vii) Interest or other income received out of the investments made from the Fund
(Section 205C(2)). The fund shall be utilized for promotion of investor awareness
and protection of interest of investor in accordance with the rules as may be
prescribed.
Question 114
XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For better
administrative conveniences the company wants to shift its registered office from
Mumbia to PUne (State of Maharashtra). What formalities the company has to comply
with under the provisions of the Companies Act, 1956 for shifting its registered office
as stated above ? Explain.
(November 2006)
Answer
According to Section 17A read with Section 146 of the Companies Act, 1956, the
following procedure is to be followed by the company for shifting of the registered
office of the company:
(i) A special resolution is required to be passed at a general meeting of the share
holders.

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(ii) Confirmation of Regional Director is to be obtained and for this company has to
apply in the prescribed form.
(iii) The Regional Director shall convey his confirmation within four weeks from the date
of receipt of the application.
(iv) Copy of the special resolution within 30 days and certified copy of the confirmation
along with a printed copy of the altered memorandum of association must be filed
with the Registrar of companies within 2 months from the date of confirmation.
(v) Within one month of the filing, the Registrar of companies shall certify registration,
which shall be the conclusive evidence that all requirements with respect to
alteration and conformation have been complied with.
Question 115
With a view to issue shares to the general public a prospectus containing some false
information was issued by a company. Mr. X received copy of the prospectus from the
company, but did not apply for allotment of any shares. The allotment of shares to the
general public was completed by the company within the stipulated period. A few
moths later, Mr. X bought 2000 shares through the stock exchange at a higher price
which later on fell sharply. X sold these shares at a heavy loss. Mr. X claims damages
from the company for the loss suffered on the ground the prospectus issued by the
company contained a false statement. Referring to the provisions of the Companies
Act, 19546 examine whether X’s claim for damages is justified.
(November 2006)
Answer
According to Section 62 of the Companies Act, 1956, every director, promoter and
every person who is responsible for the issue of the prospectus containing false or
untrue information are liable to compensate all those persons who subscribe to the
shares on the faith of prospectus. It was held in the case of Peek Vs. Gurney that the
above-mentioned remedy by way or damage will not be available to a person if he has
not purchased the shares on the basis of prospectus. Since X purchased shares
through the stock exchange open market which cannot be said to have bought shares
on the basis of prospectus. X cannot bring action for deceit against the directors. X
will not succeed.
Question 116
Explain the provisions of the Companies Act, 1956 relating to ‘Resolutions requiring
Special Notice’. State the resolutions that require ‘Special Notice’ under the Act.
(November 2006)
Answer
Special Notice (Section 190)
Section 190 of the Companies Act, 1956 deals with resolutions requiring special notice.
Accordingly the section provides that where under any provision contained the
Company Act or in the Acts, special notice is required to be given of any resolution,
notice of intention to move the resolution should be given to the company, not less
than 14 days clear days before the meeting at which it is to be moved.
Special notice is required to move, besides the resolution mentioned in the Articles, the
following resolutions:

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(i) a resolution appointing an auditor other than the retiring one. (Section 225)
(ii) a resolution providing expressly that the retiring auditor shall not be reappointed.
(Section 225)
(iii) a resolution purporting to remove a director before the expiry of his period of
office. (Section 284).
(iv) a resolution to appoint another director in place of the removed director. (Section
284)
Question 117
Distinguish between ‘Reduction of Share Capital’ and Diminution of Share Capital’.
(Novembe
r 2006)
Answer
(i) Reduction of capital may be a reduction in nominal capital, subscribed capital or
paid up capital whereas diminution denotes a cancellation of that portion of the
issued capital which has not been subscribed [Section 94(1) (e)]
(ii) Both require authorization by Articles but reduction of capital can be effected only
by a special resolution whereas diminution can be effected by an
ordinary resolution.
(iii)Reduction of capital needs confirmation by the court [Section 101] whereas
diminution needs no such confirmation [Section 94(2)]
(iv) In case of reduction, Court (now Tribunal) may order the company to add the
words ‘and reduce’ after its name [Section 102(3)] but no such order can be
passed in case of diminution [Section 94]
(v) In case of diminution notice is to be given to the Registrar within 30 days from the
date of cancellation, whereas in the case of reduction more detailed procedure
regarding notice to the Registrar has been prescribed by section 103, though there
is no such time limit as aforesaid.
Question 118
X had applied for the allotment of 1,000 shares in a company. No allotment of shares
was made to him by the company. Later on, without any further application from X,
the company transferred 1,000 partly-paid shares to him and placed his name in the
Register of Members. X, knowing that his name was placed in the Register of
Members, took no steps to get his name removed from the Register of members. The
company later on made final call. X refuses to pay for this call. Referring to the
provisions of the Companies Act, 1956, examine whether his (X’s) refusal to pay for
the call is tenable and whether he can escape himself from the liability as a member of
the company. (November 2006)
Answer
According to Section 164 of the Companies Act, 1956, the register of member is a
prima facie evidence of the truth of its contents. The contents of the register of
members are of decisive importance in determining as to who were the shareholders of

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the company at a crucial time. Accordingly, if a person’s name, to his knowledge, is
there in the register, he shall be deemed to be a member. In the given case X knows
that his name is included in the register of shareholders and stands by and allows his
name to remain, he is holding out to the public that he is shareholder and thereby he
will be liable as shareholder.
Question 119
DJA Company Ltd. has only 50 preference shareholders. A meeting of the preference
shareholders who called by the company for amending the terms of these shares. Mr.
A, was the only preference shareholder who attended the meeting. He, however, held
proxies from all other shareholders. He took the Chair, conducted the meeting and
passed a resolution for amending the terms of the issue of these shares. Referring to
the provisions of the Companies Act, 1956, examine the validity of the meeting and the
resolution passed thereat.
(November 2006)
Answer
This question was decided in Sharp Vs., Dawes case which provides that “The word
meeting prima facie means coming together of more than one person.” In this given
case, only one shareholder present. This was not a meeting within the meaning of the
Companies Act, 1956. According to Section 174 another requirement of valid meeting
is the presence of a required quorum. Moreover, the section also says that “the
members actually present shall be the quorum.” The presence of one member may not
be enough. This was not a valid meeting.
In East Vs. Bennet Brothers Ltd. (1911) it has been held that in case of a class meeting
of all the shares of a particular class are held by one person, one person shall form the
quorum. In the given case, since all the shares are not held by one person, no quorum
is therefore present. The meeting and the resolution passed there shall not be valid.
Question 120
Who are entitled to get notice for the general meeting called by a Public Limited
Company registered under the Companies Act, 1956 ? Does the non-receipt of a notice
of the meeting by any one entitled to such notice invalidate the meeting and the
resolution passed thereat ? What would be your answer in case the omission to give
notice to a member is only accidental omission ?
(November 2006)
Answer
Notice of meeting shall be given -
(i) to every member of the company;
(ii) to the persons entitled to a share in consequence of the death or insolvency of a
member;
(iii) to a auditor or auditors [Section 172(2)] and,
The company cannot take notice of the beneficial owners of shares who are, therefore,
not entitled to notice, where, however, anyone is legally entitled to represent the
members, such representative is entitled to receive the notice.

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The private company, which is not, a subsidiary of a public company may prescribe, by
its articles, persons to whom the notice should be given.
The non-receipt of notice or accidental omission go given notice to any member shall
not invalidate the proceedings in the meeting [Section 172(3)]. However, omission to
serve notice of meeting on a member on the mistaken ground that he is not a
shareholder cannot be said to be an accidental omission. Accidental omission means
that the omission must be not only designed but also not deliberate. [Maharaja Export
Vs. Apparels Exports Promotion Council (1986)].
Question 121
When is an expert not liable for untrue statements in the prospectus issued by a
company ? (November 2006)
Answer
According to Section 62(3) of the Companies Act, 1956, an expert who would be liable
by reason of having given his consent under Section 58 to the issue of the prospectus
containing a statement made by him wouldn’t be liable if he can prove:
(i) that having given his consent to the issue of the prospectus, withdrew it in writing
before the delivery of a copy of the prospectus for registration, or
(ii) that after the delivery of a copy of the prospectus for registration but before
allotment, he on becoming aware of the untrue statement withdrew his consent in
writing and gave reasonable public notice thereof and the reasons therefore; or
(iii) that he was competent to make the statement and he had reasonable ground to
believe, and did up to the time of allotment of the shares and debentures believe
that the statement was true.
Question 122
Referring to the provisions of the Companies Act, 1956 state the mattes relating to
‘Ordinary Business’ which may be transacted at the Annual General Meeting of a
Company. What kinds of resolutions need to be passed to transact the ‘ordinary
Business’ and the ‘Special Business’ at the Annual General Meeting of the Company ?
Explain. (November 2006)

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Answer
Ordinary Business (Section 173)
In accordance with the provision of Companies Act, 1956 as contained in Section 172,
the business to be transacted at an AGM may comprise of:
(i) Ordinary Business: Which relate to the following matters:
(a) Consideration of accounts, balance sheet and the report of the Board of
Directors and auditors.
(b) Declaration of dividend.
(c) Appointment of Directors in place of those retiring; and
(d) appointment of auditors and fixation of their remuneration.
(ii) Special Business: Any other business scheduled to be transacted at the meeting
shall be deemed to be special business.
Ordinary business can be passed by an ordinary resolution. However, special
business may be transacted either by passing ordinary resolution or special
resolution, depending upon the requirements of Companies Act, 1956.
Question 123
The object clause of the Memorandum of Association of LSR Private Ltd, Lucknow
authorized it to do trading in fruits and vegetables. The company, however, entered
into a Partnership with Mr. J and traded in steel and incurred liabilities to Mr. J. The
Company, subsequently, refused to admit the liability to J on the ground that the deal
was ‘Ultra Vires’ the company. Examine the validity of the company’s refusal to admit
the liability to J. Give reasons in support of your answer. (May 2007)
Answer
In terms of Companies Act, 1956, the powers of the company are limited to:
(i) Powers expressly given by the Memorandum (which is popularly known as ‘express’
power or conferred by the Companies Act 1956, or other statute and
(ii) powers reasonably incidental or necessary to the company’s main purpose (termed
as “Implied’ powers). The Act further provides that the acts beyond the powers of a
company are ultra vires and void and cannot be ratified even though every member
of the company may give his consent [Ashbury Railway Carriage Company Vs
Richee]
The object clause enable shareholders, creditors or others to know what its powers are
and what is the range of its activities and enterprises. The objects clause therefore is of
fundamental importance to the share holder, creditors and others.
M/s LSR Pvt. Ltd is authorised to trade directly on fruits and vegetables. It has no
power to enter into a partnership for Iron and steel with Mr. J. Such act can never be
treated as ‘express’ or ‘implied’ powers of the company. Mr J who entered into
partnership is deemed to be aware of the lack of powers of M/s LSR (Pvt) Ltd. In the
light of the above, Mr, J cannot enforce the agreement or liability against M/s LSR Pvt.
Ltd. Mr. J should be advised accordingly. This conclusion is supported by the decision
reported in the case of ‘The Ganga Mata Refinery Company (Pvt) Ltd CIT.
Question 124

CA-IPCC
VRS Company Ltd. is holding 45% of total equity shares in SV Company Ltd. The Board
of Directors of SV Company Ltd. (incorporated on January 1, 2004) decided to raise the
share capital by issuing further Equity shares. The Board of Directors resolved not to
offer any shares to VRS Company Ltd, on the ground that it was already holding a high
percentage of the total number of shares already issued, in SV Company Ltd. The
Articles of Association of SV Company Ltd. provide that the new shares be offered to
the existing shareholders of the company. On March 1, 2007 new shares were offered
to all the shareholders except VRS Company Ltd. Referring to the provisions of the
Companies Act, 1956 examine the validity of the decision of the Board of Directors of
SV Company Limited of not offering any further shares to VRS Company Limited.(May
2007)
Answer
The problem as asked in the question is based on the application of the provisions of
the Companies Act, 1956 as contained in Section 81 and the ruling given in Gas Meter
Co. Ltd. Vs Diaphragm & General leather co. Ltd.
According to Sec 81, if at any time after the expiry of two years from the formation of
the company or after the expiry of one year from the first allotment of shares,
whichever is earlier, it is proposed to raise subscribed capital by allotment of further
shares, it should be offered to the existing equity share holders of the company in
proportion to the capital paid upon those shares. Further in case of Gas Meter Ltd. Vs
Diaphragm, & General; leather Co. Ltd where the facts of the case were similar to those
given in the problems asked in the question, the articles of Diaphagm Co. provided that
the new shares should first be offered to the existing share holders. The company
offered new shares to all shareholders excepting Gas Co., which held its controlling
shares. It was held that D company could be sustained from doing this.
In the given case applying the provisions and the ruling in the above case, SV Ltd.’s
decision not to offer any further shares to VRS Co. Ltd on the ground that VRS Co. Ltd
already held a high percentage of shareholding in SV Co. Ltd. is not valid for the reason
that it is violative of the provisions of Section 81 and against the ruling in the above
case.
Secondly, the offer for issue of the shares was made on 1 st March 2007, i.e. after two
years of the formation of the company. Therefore Board of Directors of SV Ltd cannot
take a decision not to allot shares to VRS Company, unless the same is approved by the
Co. in general meeting by means of special resolution as required under Section 81 (A).
Question 125
X, a registered shareholder of Y Limited left his share certificates with his broker. A
forged the transfer deed in favour of Z, accompanied by these share certificates lodged
the transfer deed alongwith the share certificates with the company for registration.
The Company Secretary who had certain doubts, wrote to X informing him of the
proposed transfer and in the absence of a reply from him (X) within the stipulated time,
registered the transfer of shares in the name of Z. Subsequently, Z sold the shares to J
and J’s name was placed in the register of shareholders. Later on, X discovered that
forgery has taken place.
Referring to the provisions of the Companies Act, 1956, state the remedy available to X
and Z in the given case. Explain. (May 2007)
Answer

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In the given case, there is a forged transfer of shares. The company in such a case
should first inquire into the validity of the instrument of transfer. It should also send a
notice to the transfer or of his address and inform him that such a transfer has been
lodged and if no objection is made before this specified date, it would be registered.
Remedies available to X:
Since a forged transfer is a nullity, it does not pass any legal title to the transferee.
The true owner can have his name restored on the register of member. A forged
document can never have any legal effect.
(1) Can also claim any dividend, which may not have been paid to him during the
intervening period. (Barton V North Staffordshire)
Remedy to Z:
(2) If by forgery a person obtains a certificate of transfer of shares from a company and
transfers the shares to a purchaser for value acting in good faith i.e. without the
knowledge of forgery, such purchaser does not get good title to the shares so
transferred because a forged transfer is a nullity and cannot be a source of a valid
transfer of title. But the company shall be liable to compensate the purchaser in so
far as the company had issued a certificate to transfer and was therefore, estopped
from denying the liability accruing from his own act. Therefore, if Z has suffered any
loss, he can claim it from the company in this case.
Question 126
The paid-up Share Capital of AVS Private Limited is Rs. 1 crore, consisting of 8 lacs
Equity Shares of Rs. 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of
Rs. 10 each, fully paid-up. XYZ Private Limited and BCL Private Limited are holding 3
lacs Equity Shares and 1,50,000 Equity Shares respectively in AVS Private Limited.
XYZ Private Limited and BCL Private Limited are the subsidiaries of TSR Private Limited.
With reference to the provisions of the Companies Act, 1956, examines whether AVS
Private Limited is a subsidiary of TSR Private Limited ? Would your answer be different
if TSR Private Limited has 8 out of total 10 directors on the Board of Directors of AVS
Private Limited? (May 2007)
Answer
Holding, subsidiary relationship: For the purpose of determining whether a
company is subsidiary of another company, only equity shares issued by the first
mentioned company are to be taken into account [Section 4 (1) (b) (ii), Companies Act,
1956]. Again, shares held by a subsidiary company shall be treated as held by its
holding company [Section 4 (3) (b) (ii)] If a company by itself or along with its
subsidiaries holds more than half in nominal value of the equity shares capital of
another company, it will be considered as the holding company of the other company
[Section 4(3) (b) (ii)]
In this case, the equity share capital of AVS Pvt. Ltd. is Rs. 80,00,000 consisting of
8,00,000 equity shares of Rs 10 each fully paid up XYZ and BCL Pvt. Ltd. are holding
4,50,000 (3,00,000+1,50,000) equity shares in AVS Pvt Ltd., TSR Pvt, Ltd will be
treated as holding more than half in nominal value of the equity share capital of AVS
Pvt Ltd.

CA-IPCC
If TSR Pvt. Ltd. controls the composition of the Board of Directors of AVS Pvt. Ltd; it will
also be treated as holding company by virtue of Section 4 (1) (a). Hence the answer
will not be different.
Question 127
State the purposes for which the object clause of the Memorandum of Association of a
public limited company, registered under the Companies Act, 1956, can be altered.
(May 2007)
Answer
The members of a company may rightly expect that their money would be employed
only for the objects for which the company has been established. Accordingly, the Act
permits alteration of the object, only so far as is considered necessary for specified
purposes. Section 17 (1) permits a company to alter its objects for the
undermentioned purposes:
(a) to carry on business more economically:
(b) to attain the main purpose of the company by new or improved means:
(c) To carry on some business which under the existing circumstance may conveniently
or advantageously be combined with the existing business.
(d) To change and enlarge the local area of operations;
(e) To restrict or abandon any of the existing objects;
(f) To sell or dispose of the whole or any part of the undertaking;
(g) To amalgamate with any other objects or body or person.
Question 128
Explain the provisions of the Companies Act, 1956 relating to the ‘Service of
Documents’ on a company and the members of the company. When is service of
document deemed to be effective in case the document is sent by post ?Explain.
(May 2007)
Answer
According to Section 53 of the Companies Act, 1956, a company may serve a document
on its member either personally, or by sending it by post to him to his registered address, or if he has
no registered address in India, to the address, if any, within India supplied by him to the company for the
giving of notices to him [Section 53 (1)]. If a person residing abroad has not supplied to the
company an address within India for the purpose of giving notice to him, then a
document advertised in a newspaper circulating in the neighbourhood of the registered
office of the company shall be deemed to be duly served on him on the day on which
the advertisement appears [Section 53 (3)]. In the case of joint holders of a share,
notice may be served on the joint holder named first [Section 53(4)]. When a share
holder dies, it becomes the duty of the legal representative to furnish their address for
a notice to be sent and if they fail to send the intimation to the company, the company
is entitled to serve at the address which is recorded with it. The same rule applies in
the case of insolvent member, when the assignees have not furnished their address
[Section 53 (5)].

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Where a document is sent by post, it is enough if the letter containing the document is
properly addressed and sent by ordinary post. But at the request of any member,
notice may be served by registered post or under certificate of posting, provided the
member has deposited adequate money to meet the expenses {Section 53 (2) (a)].
Where a document is served by post, service shall be deemed to have been effected:
(1) In the case of notice of a meeting at the expiration of 48 hours after the letter
containing the same is posted, and
(2) In any other case at the time at which the letter would be delivered on the ordinary
course of post.
Question 129
State any six charges which are required to be registered under the provisions of the
Companies Act, 1956. What is the effect of non-registration of a charge required to be
registered under the Act ? Explain. (May 2007)
Answer
As per Section 125, Companies Act, 1956, the following are the charges required to be
registered with the registrar of companies within 30 days after the date of its creation:
(i) a charge for the purpose of securing any issue of debentures;
(ii) a charge on uncalled share capital of the companies;
(iii) a charge on any immovable property, wherever situated, or any interest therein;
(iv) a charge on any book debt of the company;
(v) a charge not being a pledge, on any movable property of the company;
(vi) a floating charge on the undertaking or any property of the company including
stock-in-trade;
(vii) a charge on calls made but not paid,
(viii) a charge on a ship or any share in ship;
(ix) a charge on goodwill on a patent or licence under a patent, on a trademark or on
a copyright or a license under a copy right.
Effect of non registration of charge: -

If any of the charges is not registered, it shall be void against the liquidators and any
creditor of the company [Section 125 (1)] (Monalithic Building Co.)
When the charge becomes void, the money secured thereby shall immediately become
payable (Section 125 (3). The company and every officer of the company may be
subjected to a penalty up to Rs. 5000 for every day during which the default continues.
In the event of the charge being void for non registration no right of lien can be
claimed on the documents of title, as they are only ancillary to the charge and were
delivered pursuant to the charge (In re Moltan Ltd) Though the charge becomes void
for non-registration, but the debt is good as a simple debt (C. Padam ji Co. V Moose)
Question 130
Though six out of seven signatures to the Memorandum of Association of a company
were forged, the company was registered and the Certificate of Incorporation was
issued. Can the registration of the company be challenged subsequently on the ground
of forged signatures ?

CA-IPCC
(May 2007)
Answer
No. Registration cannot be challenged. Section 35 of the Companies Act 1956 declares
that certificate of incorporation given by the Registrar in respect of any company shall
be conclusive evidence that all the requirements of the Act have been complied with in
respect of registration and matters precedent and incidental thereto, and that the
association is company authorized to be registered and duly registered under the Act.
(Peel’s Case)
Question 131
Who are the persons entitled to receive notice of a general meeting of a company,
registered under the Companies Act, 1956 ? Shall the non-receipt of notice of the
general meeting by any member invalidate the proceedings of the meeting ? Explain.
(May 2007)
Answer
Persons entitled to notice: Notice of the meeting shall be given:
(a) To every member of the company;
(b) To the persons entitled to a share in consequence of the death or insolvency of a
member;
(c) To an auditor or auditors [Section 172 (a); and
The company cannot take notice of the beneficial owner of shares who are, therefore,
not entitled to receive notice. Where, however, anyone is legally entitled to represent
the member, such representative is entitled to receive the notice.
A private company, which is not, a subsidiary of a public company may prescribe, by its
Articles, persons to whom the notice should be given. It does not always follow that all
the members of a company are entitled to receive notice of meetings of the company;
the Articles frequently provide that preference shareholders shall not be entitled to
receive notice of and vote at general meeting of the company, except in certain
circumstances. There is a statutory obligation to send notice to preference
shareholders when their dividend is in arrears for more that a certain period [section
87(2) (b)]. This obligation arises from the fact that preference shareholders whose
dividends are in arrears are entitled to attend and vote at the meeting.
The non-receipt of notice or accidental omission to give notice to any member shall not
invalidate the proceeding in the meeting [Section 172 (3)]. However, omission to serve
notice of meeting on a member on the mistaken ground that he is not a shareholder
cannot be said to be an accidental omission [Musselwhite Vs. C.H. Musselwhite & Sons
Ltd. (1962) 32 Comp. Cas 804]. ‘Accidental omission’ means that the omission must be
not only designed but also not deliberate [Maharaja Export Vs. Apparels Exports
Promotion Council (1986) 60 Comp. Cas 353.].
Question 132
ABC Limited served a notice of a general meeting upon its members. The notice stated
that a resolution to increase the Share Capital of the company would be considered at
the meeting. A member complains to the company that the amount of the proposed
increase was not specified in the notice. In the light of the provisions of the Companies
Act, 1956, examine the validity of the notice. (May 2007)

CA-IPCC
Answer
Section 173 of the Companies Act, 1956 requires a company to annex an explanatory
statement to every notice for a meeting of company, at which some ‘special business’
is to be transacted. This explanatory statement is to bring to the notice of members all
material facts relating to each item of special business. Section 173 further specifies
that all business in case of any meeting is regarded as special business. Thus, the
objection of the shareholder is valid since the details on the item to be considered are
lacking. The information about the amount is a material fact with reference to the
proposed increase of share capital. The notice is, therefore, not a valid notice under
Section 173.
Question 133
XYZ Limited held its Annual General Meeting on September 15, 2006. The meeting was
presided over by Mr. V, the Chairman of the Company’s Board of Directors. On
September 17, 2006, Mr. V, the Chairman, without signing the minutes of the meeting,
left India to look after his father who fell sick in London. Referring to the provisions of
the Companies Act, 1956, state the manner in which the minutes of the above meeting
are to be signed in the absence of Mr. V and by whom. (May 2007)
Answer
By virtue of Section 193 (1A) (b) of the Companies Act, 1956, minutes of proceeding of
general meeting can be signed and dated within a period of 30 days, by a director duly
authorized by the board for the purpose. In the circumstances contemplated by the
question, therefore, a Board meeting has to be convened and one of the directors
present thereat be authorized to sign and date the minutes of the annual general
meeting.
Question 134
A limited company is formed with its Articles stating that one Mr. X shall be the solicitor
for the company, and that he shall not be removed except on the ground of
misconduct. Can the company remove Mr. X from the position of solicitor even though
he is not guilty of misconduct? (November 2007)
Answer
The Articles of Association of a company are its bye-laws that govern the management
of its internal affairs. As between outsiders and the company, Articles do not give any
right to outsiders against the company even though their names might have been
mentioned in the Articles. An outsider cannot take advantage of the Articles to found
claim thereon against the company. Thus, in the given case, the company shall
succeed in removing Mr. X as solicitor of the company (Eley V Positive Government
Security Life Assurance Co.)
Question 135
For a special resolution in a Company's general meeting, 10 voted in favour, 2 against
and 4 abstained. The chairman declared the resolution as passed. Is it a valid
resolution as per the provisions of the Companies Act, 1956. (November 2007)
Answer
Yes, it is a valid resolution. Section 189 (2) (c) of the Companies Act. 1956 provides
that the votes cast in favor of resolution (whether on a show of hands, or on a poll as
the case may be) by members who, being entitled so to do, vote in person or where

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proxies are allowed, by proxy, are not less than three times the number of votes, if
any, cast against resolution by members so entitled and voting.
Question 136
While sanctioning working capital limit of a company, the rate of interest has been
fixed at a specified percentage above the bank rate as notified by the Reserve Bank of
India. There was a change in the interest rate due to RBI notification issued later. The
bank insisted on filing a return of modification of charges. Is the stand of the bank
correct? Discuss this in the light of the provisions of the Companies Act, 1956.
(November 2007)
Answer
Section 135 of the Companies Act, 1956 provides that whenever the terms or
conditions or the extent or operation of any charge registered under this part are or is
modified, it shall be the duty of the company to send to the Registrar the particulars of
such modifications and the provisions of this part as to registration of a charge shall
apply to modification of the charge. In the light of this provision the changes in the rate
of interest constitute modification; therefore, the stand of bank is correct.
Question 137
Under what circumstances a company can reduce its share capital? (November
2007)
Answer
Section 100 of the Companies Act, provides that a company, limited by shares or
guarantee and having share capital, if so authorised by the articles, may by special
resolution and with the confirmation of the Court, reduce its share capital in any way
and in particular by:
(a) extinguishing or reducing the liability of members in respect of the capital not
paid up:
(b) writing off or cancelling any paid-up capital which is in excess of the needs of the
company.
(c) paying off any paid-up share capital which is in excess of the needs of the
company.
Reduction in (b) and (c) may be made either in addition or without extinguishing or
reducing the liability of the members for uncalled capital. Reduction of share capital
may in reality take three forms, namely, (i) reducing the value of shares in order to
absorb the accumulated losses suffered by the company without any payment to the
shareholders; (ii) extinction of liability of capital not paid; (iii) paying off any paid-up
share capital. Only in the circumstances referred to in (ii) and (ii) is the interest of
creditors really involved.
Question 138
What is the concept of proxy in relation to the meetings of a Company? Decide the
appointment and rights of a proxy, under the Companies Act, 1956, in the following
cases:
(i) When a body corporate is a member in the company.
(ii) When a foreign company is a member in the company. (November
2007)

CA-IPCC
Answer
(e) A proxy is a person, being a representative of a share holder at a meeting
company who may be described as his agent to carry out which the shareholder
has himself decided upon. [Cousin vs. International Brick Co, 1931].
The appointment of a proxy must be made by a written instrument signed by the
appointer or his duly authorised attorney. The instrument of proxy has to be in the
prescribed form set out in Schedule IX.
Section 187 of the Companies Act, 1956 provides that where a company is a
member of another company it may attend the meeting of any other company
through a representative. The representative must be appointed by a resolution of
the Board of directors or the other governing body, the person so appointed is
entitled to exercise the same rights and powers (including the right to vote by
proxy) on behalf of the company as the individual member of the company may
exercise.
Foreign company can also make the use of this provision or it may by means of
power of attorney. [CEPT v. Jeevanlal Ltd., (1951)]
Question 139
X, a chemical manufacturing company distributed 20 lac (Rs. Twenty Lac) to scientific
institutions for furtherance of scientific education and research. Referring to the
provisions of the Companies Act, 1956 decide whether the said distribution of money
was "Ultra vires' the company? (November 2007)
Answer
Distribution of Rupees Twenty Lac by a company engaged in Chemical manufacturing is
not 'Ultra Vires' the company since it was conducive to the continued growth of the
company as chemical manufacturers (Evans v. Brunnner, Mood & Co. Ltd. 1921).
Question 140
How nomination facility shall operate in case of transmission of shares under the
provisions of the Companies Act, 1956? (November 2007)
Answer
Section 109 of the Act provides that any person who becomes a nominee by virtue of
the provisions of Section 109 A, upon the production of such evidence as may be
required by the Board and subject as hereinafter provided, elect, either
(a) to be registered himself as holder of the share or debenture, as the case may be;
or
(b) to make such transfer of the share or debenture, as the case may be as the
deceased shareholder or debenture holder, as the case may be, could have made.
If the person being a nominee, so becoming entitled, elects to be registered as holder
of the share or debenture, himself as the case may be, he shall deliver or send to the
company a notice in writing signed by him stating that he so elects and such notice
shall be accompanied with the death certificate of the deceased shareholder or
debenture holder, as the case may be. (Sub-section 2).
Question 141

CA-IPCC
Sunrise Limited submitted the documents for incorporation on 5th October, 2006. It
was incorporated and certificate of incorporation of the company was issued by the
Registrar on 20th October, 2006. The company on 14th October, 2006 entered into a
contract which created its contractual liabilities. The company denies the said liability
on the ground that company is not bound by the contract entered into prior to issuing
of certificate of incorporation. Decide under the provisions of the Companies Act, 1956,
whether the company can be exempted from the said contractual liability. (November
2007)
Answer
Sometimes contracts are made on behalf of a company even before it is incorporated.
But no contracts can bind a company before it becomes capable of contracting by
incorporation. Two consenting parties are necessary to a contract, whereas the
company before incorporation is a non-entity [Kelner v. Baxter 1866].
Pre-incorporation contracts in general are void ab initio and hence not binding on the
company. However, under section 19 (e) of the Specific Relief Act, 1963 the party to
the contract can enforce the contracts against the company if the company had
adopted the same after incorporation and the contract is warranted by the terms of
incorporation. Thus unless the company adopts the contract, the other party cannot
enforce the same against the company. However, promoters can be-held personally
liable. The problem is based on above case i.e. Kelner v. Baxter. After application of
above provisions it is clear that the company can be exempted from the said
contractual liability .
Question 142
P the secretary of a XYZ Limited issues a Share certificate in favour of A purporting to
be signed by the directors and the secretary and the seal of the company affixed to it.
In fact the secretary forged the signature of the directors and has affixed the seal
without authority. Can A hold the company liable for the shares covered by the share
certificate, under the provisions of the Companies Act, 1956? (November
2007)
Answer
Share certificate is a document under the common seal of the company specifying that
a member is the holder of specified number of shares of the company. The company is
estopped from denying the title of the shareholder on number of shares in the share
certificate. Hence share certificate is a prima facie evidence of the title of member to
such shares.
Facts given in the problem are based on the facts of Rubben v. Great Fingall
Consolidated Co. [1906]. In this case it was held that the company is liable if an officer
of the company, who has no authority to issue a certificate, issues a forged certificate.
Hence A can hold the company liable for the shares covered by the forged share
certificate issued by P, the secretary of XYZ Limited.
Question 143
Examine the validity of the following with reference to the relevant provisions of the
Companies Act, 1956:

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(i) The Board of Directors of a company refuse to convene the extraordinary general
meeting of the members on the ground that the requisitionists have not given
reasons for the resolution proposed to be passed at the meeting.
(ii) The Board of Directors refuse to convene the extraordinary general meeting on
the ground that the requisitions have not been signed by the joint holder of the
shares.
(iii) Adjournment of extraordinary general meeting called upon the requisition of
members on the ground that the quorum was not present at the meeting.
(November 2007)
Answer
As per Section 169 of the Companies Act 1956, the Board of directors must convene a
general meeting upon request or requisition if certain conditions are satisfied.
(i) The requisitions must state the objects of the meeting, i.e., it must set out the
matters for the consideration of which the meeting is to be called [Section 169 (2)].
However, the requisitionists are under no obligation to attach the explanatory
statement to the requisition. It is for the Board of directors, on receipt of the
requisition, to include in the notice convening the meeting, the necessary
explanatory statement (Life Insurance Corporation of India v. Escorts Ltd. 1986.).
In given problem (i) the Board of Directors may refuse to convene the meeting
because reasons for the resolution is not given.
(ii) Where two or more persons hold any shares or interest in a company jointly, a
requisition, or notice calling a meeting, signed by one or some of them shall, for the
purposes of this section, have the same force and effect as if it had been signed by
all of them [Section 169 (8)].
On the basis of above section the Board of Directors has no right to refuse to
convene the meeting in the given problem (ii).
(iii) As per Section 147 of the Companies Act, 1956, if in a requisitioned meeting,
there is no quorum present within half an hour, the meeting stands dissolved.
The stand taken by the Board of Directors is proper in the given problem (iii).
Question 144
What are the differences between "Share certificate and Share warrant"? (November
2007)
Answer
The difference between .share certificate and share warrant may be as follows
1. A share certificate is a prima facie evidence of title whereas a share warrant is a
bearer document, stating that the holder is entitled to certain number of shares
specified therein.
2. The holder of share certificate is a member of the company whereas the holder of
share warrant may be a member (Provided by Articles).
3. A share warrant is a negotiable instrument whereas a share certificate is not so.
4. In order to qualify as director a person should acquire a share certificate instead of
a share warrant.

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5. A share certificate can be issued for a fully or partly paid up shares. On the other hand
a share warrant can be issued in respect of fully paid up share only.
Question 145
ABC Pvt. Ltd., Company is a Private Company having five members only. All the
members of the company were going by car to Mumbai in relation to some business.
An accident took place and all of them died. Answer with reasons, under the
Companies Act, 1956 whether existence of the company has also come to the end?
(May 2008)
Answer
Death of all members of a Private Limited Company, The Companies Act, 1956
A joint stock company is a stable form of business organization. Its life does not
depend upon the death, insolvency or retirement of any or all shareholder(s) or
director(s). The provision for transferability or transmission of the shares helps to
preserve the perpetual existence of a company. Law creates it and law alone can
dissolve it. Members may come and go but the company can go on forever. So in such
case, the ABC Pvt. Ltd. Co. does not cease to exist. By way of transmission of shares,
shares are transmitted to their legal representatives. The company ceases to exist
only on the winding up of the company. Therefore, even with the death of all members
(i.e. 5), ABC (P) Ltd. does not cease to exist.
Question 146
Before the incorporation of the company, the promoters of the company entered into
an agreement with Mr. Jainson to buy an immovable property on behalf of the
company. After incorporation, the company refused to buy the said property. Advise
Mr. Jainson whether he has any remedy under the provisions of the Companies Act,
1956? (May 2008)
Answer
Pre-Incorporation Contracts, The Companies Act, 1956
The present case is related to the pre-incorporation contract. The promoters of the
company usually enter into contracts to acquire some property or right for the
company which is yet to be incorporated. As such contracts are a nullity and the
company cannot sue or be sued on such contract when company comes into existence.
So in such case ‘A’ has remedy against the promoters only. They are liable personally
for those contracts that are made on behalf of the company before it comes into
existence. Even the company cannot ratify such contracts after its registration. Such
contracts are deemed to have been entered into personally by the promoters.
Question 147
Explain the doctrine of “Ultra-vires”. What are the legal effects of ultra-vires
transactions under the Companies Act, 1956? (May 2008)
Answer
Doctrine of Ultra Vires, The Companies Act, 1956
A company has the power to do all such things as are:
1. Authorised to be done by the Companies Act, 1956;

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2. Essential to the attainment of its objects specified in the Memorandum.
3. Reasonably and fairly incident to its objects.
Everything else is ultra vires the company. The term ‘ultra vires’ means that the doing
of the act is beyond the legal power and authority of the company. If an act is ultra
vires the company, no legal relationship or effect ensues there from. Such an act is
absolutely void and even the whole body of shareholders cannot ratify it and make it
binding on the company. The leading case on the point is Ashbury Rly. Carriage & Iron
Co. Ltd. Vs. Riche where it was held that a company being a corporate person should
not be fined or punished for its own acts or an act of its agent, if it is beyond its powers
and privileges. Main features of the doctrine of ultra vires are:
1. when an act is performed or a transaction is carried out which, though legal itself, is
not authorized by the objects clause in the memorandum or by Statute, it is said to
be ultra vires the company.
2. if an act is ultra vires the company, it cannot be ratified even by the whole body of
shareholders.
3. if an act is ultra vires the directors, but intra vires the company, it can be ratified by
the whole body of shareholders.
4. if an act is ultra vires the Articles, it can be ratified by altering the Articles by a
special resolution at a general meeting.
Effect of ultra vires transaction and borrowing: An ultra vires transaction being void
does not vest the transferee with any right; nor does it divest the transferor. It means
the transferor does not lose any right and the transferee does not get any right.
Question 148
Under the Articles of Association of Sunshine Ltd. Company, directors had power to
borrow up to Rs.10,000 without the consent of the general meeting. The Directors
themselves lent Rs.35,000 to the company without such consent and took debentures
of the Company. Decide under the provisions of the Companies Act, 1956, whether the
company is liable? If so, what is the extent of liability of the company in this case?
(May 2008)
Answer
Directors’ Power to Borrow, The Companies Act, 1956
An outsider is presumed to know the constitution of company, but not what may or may
not have taken place within the doors that are closed to him. However, where a person
dealing with a company has actual or constructive notice of the irregularity as regards
internal management, he cannot claim the benefit under the rule of indoor
management.
In this case, the directors of a company could borrow any amount up to Rs. 10,000/-
without the resolution of the company in a general meeting. But for any amount
beyond Rs. 10,000/- they had to obtain the consent of the shareholders in a general
meeting. The directors themselves lent Rs. 35,000/- to the company without such
consent and took debentures. The directors had the notice of the internal irregularity
and hence the company was liable to them only for Rs. 10,000/-
Question 149
Explain the provisions and main contents of “Return of Allotment” under the
Companies Act, 1956. (May 2008)

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Answer
Return of Allotment (Section 75, Companies Act, 1956): Within thirty days of
allotment of shares, a company is required to send the Registrar a report, known as the
“return as to allotment”. It must contain the following particulars:
1. The number of nominal amount of shares allotted; the names, addresses, the
occupation of the allottees; the amount, if any, paid or payable on each share. No
share should be shown as allotted for cash unless cash has actually been received in
respect of the allotment.
2. Contracts in writing under which shares have been allotted for any consideration
other than cash, must be produced for examination of the Registrar.
3. Where bonus shares have been issued, the returns must show the nominal amount
of the shares allotted; names and addresses and occupations of the allottees and a
copy of the resolution authorizing the issue of such shares.
4. Where the shares have been issued at a discount, the return must include a copy of
the resolution authorizing such an issue, a copy of the Tribunal’s order sanctioning
the issue, and where the rate of discount is more than ten percent, a copy of the
order of the Central government permitting the issue.
Question 150
Explain the concept of “Sweat Equity Shares”. Point out, under provisions of the
Companies Act, 1956, the conditions of issuing of such shares and their position in the
Share-capital of the Company. (May 2008)
Answer
Sweat Equity Shares, The Companies Act, 1956
The expression ‘Sweat Equity Shares’ means equity shares issued by the company to
employees or directors at a discount or for consideration other than cash for providing
know-how or making available rights in the nature of intellectual property rights or
value additions, by whatever name called. (Explanation II to Section 79A, Companies
Act, 1956)
Conditions for issue of Sweat Equity Shares:
(a) The shares should be of a class which has already been once issued.
(b) The issue should be authorized by a special resolution at a general meeting of the
company.
(c) The resolution should specify the number of shares and their current market price
and also the class or classes of directors or employees to whom they are to be
issued and consideration for the sweat equity shares proposed to be issued.
(d) At least one year must have elapsed between the commencement of business by
the company and the date of such issue.
(e) Such shares shall be issued in accordance with SEBI Regulations. Where the shares
are not listed at a stock exchange, they can be issued as sweat equity.
Shares issued as sweat equity shares are to be treated for all purposes like other
shares and, therefore, all the limitations, restrictions and provisions relating to
equity shares will be applicable to them.
Question 151

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Peek Ltd. Co. issued and published its prospectus to invite the investors to purchase its
shares. The said prospectus contained false statement. Mr. X purchased some partly
paid shares of the company in good faith on the Stock Exchange. Subsequently, the
company was wound up and the name of Mr. X was in the list of contributors. Decide:
(i) Whether Mr. X is liable to pay the unpaid amount?
(ii) Can Mr. X sue the directors of the company to recover damages?(May 2008)
Answer
False Statement in Prospectus, the Companies Act, 1956
(i) Yes, X is liable to pay the unpaid amount on the shares. As X has purchased partly
paid shares, so he is liable for the remaining part of the shares. At the time of
winding up he is liable to contribute a contributory. The related case law in this
subject matter is Peak vs. Gurney.
(ii) No, X cannot sue the directors to recover damages for the misstatement. The
shareholder must have relied on the statement in the prospectus in applying for
shares. If a person purchases shares in open market, the prospectus ceases to be
operative. In the present case, Mr. X purchased shares in good faith on the stock
exchange. He had not relied on the statement in prospectus. So he cannot sue.
Question 152
The Articles Association of PQR Ltd. provided that documents upon the company may
be served only through E-mail. Arvind sent a document to the company by registered
post. The company did not accept the document on the ground that sending
documents to the company by post was in violation of the Articles. As a result Arvind
suffered loss. Decide the validity of argument of the company and claim of Arvind for
damages in the light of provisions of the Companies Act, 1956. (May 2008)
Answer
Service of Documents, the Companies Act, 1956
Section 51 of the Companies Act, 1956 contains the law relating to service of
documents on company. The Section provides that a document may be served on a
company or an officer thereof by sending it to the company or officer at the registered
office of the company by post under a certificate of posting or by registered post, or by
leaving it at its registered office.
Since, as per Section 9 of the Companies Act, any provision in the Articles of
Association contrary to the provisions of the Act shall be void, the requirement in the
Articles that documents shall be served on the company only through E-mail is not
valid. Accordingly, company’s refusal to accept the document is not valid and
company shall be held liable in damages to Arvind.
Question 153
The Directors of Mars India Ltd. desire to alter capital clause of Memorandum of
Association of their company. Advise them, under the provisions of the Companies Act,
1956 about the ways in which the said clause may be altered and the procedure to be
followed for the said alteration. (May 2008)
Answer
Alteration of Capital (Section 94) the Companies Act, 1956

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A limited company with a share capital can alter the capital clause of its memorandum
of association in any of the following ways, provided authority to alter is given by the
articles.
(i) it may increase its capital by issuing new shares
(ii) consolidated the whole or any part of its shares capital into shares of larger amount
(iii) convert shares into stock or vice versa
(iv) sub-divide the whole or any part of its share capital into shares of smaller
amount
(v) cancel those shares which have not been taken up and reduce its capital
accordingly.
Provisions regarding confirmation, resolution and notices: Any of the above things can
be done by the company by passing a resolution at general meeting, but do not require
to be confirmed by the National Company Law Tribunal. Within thirty days of alteration
notice must be given to the Registrar who will record the same and make necessary
alteration in the company’s memorandum and articles. Notice to the Registrar has
similarly to be given when redeemable preference shares have been redeemed.
Similar information is also required to be sent where the capital has been increased
beyond the authorized limit, or where a company, being not limited by shares, has
increased the number of its members.
Question 154
The Chairman of the meeting of a company received a Proxy 54 hours before the time
fixed for the start of the meeting. He refused to accept the Proxy on the ground that
the Articles of the company provided that a Proxy must be filed 60 hours before the
start of the meeting. Decide, under the provisions of the Companies Act, 1956 whether
the Proxy holder can compel the Chairman to admit the Proxy?(May 2008)
Answer
Proxy, the Companies Act, 1956
Yes. The holder of proxy can compel. As per Section 176(3) of the Companies Act,
1956 proxy shall be deposited with the company within 48 hours before the meeting.
Any provisions contained in the Articles of a company that requires a longer period
than 48 hours before a meeting of the company for depositing a proxy, shall have
effect as if a period of 48 hours had been required by such provision for such deposit.
Question 155
Ramesh, who is a resident of New Delhi, sent a transfer deed, for registration of
transfer of shares to the company at the address of its Registered Office in Mumbai.
He did not receive the shares certificates even after the expiry of four months from the
date of dispatch of transfer deed. He lodged a criminal complaint in the Court at New
Delhi. Decide, under the provisions of the Companies Act, 1956, whether the Court at
New Delhi is competent to take action in the said matter?(May 2008)
Answer
Jurisdiction of Court, now Tribunal, the Companies Act, 1956

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According to Section 113(1) of the Companies Act, 1956 every company, unless
prohibited by any provision of law or of any order of court, Tribunal or other authority,
shall within two months after the application for the registration of transfer of any such
shares, deliver the certificates of all shares transferred. In the case of a listed
company under the listing agreement this period has been reduced to 30 days.
The facts of the given case are similar to H.V. Jaya Ram Vs. ICICI Ltd., 1998. In this
case the Special Court for Economic Offences in the State of Karnataka rejected the
appellant’s complaint against the respondent company on the ground that since the
company had its registered office at Mumbai it is only the court which has territorial
jurisdiction over the registered office of the company that can entertain the petition
and not the court located in the State of Karnataka where the shareholder is residing.
The High Court also upheld the order of the Special Court. On appeal Supreme Court
held that cause of action for failure to deliver share certificate arises where the
registered office of the company is situated and not in the jurisdiction of the Court
located in the place where the complaint resides.
Accordingly in the present case also, the Court in New Delhi cannot entertain the
complaint against a company having its registered office in Mumbai.
Question 156
A company was started with the object of building ‘A mall with shops’. The building was
destroyed by fire and the company wanted to alter the objects clause in the
memorandum by substituting the words ‘A mall with shops’ with the words “Shops,
Residential buildings and Warehouses for letting purposes.’ Will this alteration of the
memorandum for the purpose be permissible? Decide referring to the provisions of the
companies Act, 1956. (November 2008)
Answer
Alteration of objects
Section 17 (1) of the Companies Act ,1956 , permits a company to alter its objects in
the memorandum to carry on some business which under the existing circumstances
may conveniently or advantageously be combined with the existing business.
Thus, in the given problem the new object of “shops, residential buildings and
warehouses for letting purposes” can be conveniently and advantageously combined
with the existing object of building a “mall with shops” which is obviously for letting
purposes. Accordingly, alteration is permissible.
Question 157
The Memorandum of Association of a company was presented to the Registrar of
Companies for registration and the Registrar issued the certificate of incorporation.
After complying with all the legal formalities a company started a business according
to the object clause, which was clearly an illegal business. The company contends that
the nature of the business cannot be gone into as the certificate of incorporation is
conclusive. Answer the question whether company’s contention is correct or not.
(November 2008)
Answer
Object clause

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The subscribers to the memorandum may choose any object or objects for the purpose
of their company. However there are two restrictions on the selection of “object” for a
company:
(i) the object should not include anything which is illegal or contrary to law or public
policy.
(ii) the objects should not also contemplate doing anything which is prohibited by
the Companies Act.
On applying the above provision in the present problem, the company’s contention is
wrong. Though a certificate of incorporation is a conclusive evidence of its registration,
that is, it is conclusive evidence as to the fact that all requirements of the Companies
Act for the incorporation of a company have been complied with, and that now
company is a legal entity but, it does not mean that all its objects are legal. In Bowman
v. Secular Society Ltd., the court held that the statute does not provide that all or any
of the objects specified in the memorandum, if otherwise illegal, would be rendered
legal by the certificate. Therefore, the contention of the company that the nature of
business cannot be gone into after the certificate of incorporation has been obtained is
not tenable.
Question 158
M applies for share on the basis of a prospectus which contains mis–statement. The
shares are allotted to him, who afterwards transfers them to N. Can N bring an action
for a rescission on the ground of mis-statement? Decide under the provisions of the
Companies Act, 1956.
(November 2008)
Answer
Mis-statement in prospectus
No, N cannot bring an action for rescission on the ground of mis-statement as N had
not contracted with the company on the basis of prospectus containing mis-statement.
The right to rescind the contract is available only to original allottees (Peek vs Gurney)
Question 159
What is meant by a floating charge? State the characteristics of a floating charge.
When does a floating charge crystallise? (November 2008)
Answer
Floating charge
A floating charge is an equitable charge which is not a specific charge on any property
of the company. Thus, the company may, despite the charge , deal with any of the
assets in the ordinary course of business. It is of the essence of a floating charge that it
remains dormant until the undertaking charged ceases to be a going concern or until
the person in whose favour the charge is created, intervenes.
The main characteristics of a floating charge as described in Re. Yorkshire wool
combers Association are as follows:
(i) It is a charge on a class of the company’s assets, present and future, that class
being one which, in the ordinary course of the business is changing from time to
time.

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(ii) Generally, it is contemplated that the company carry on its business in an ordinary
way with such a class of assets till some event occurs on which the charge is to
settle down on the property as then existing and the charge becomes fixed. The
moment the charge crystallises, it becomes a fixed charge.
A floating charge crystallises or gets fixed when:
(i) The company goes into liquidation or
(ii) The company ceases to carry on business
(iii) A receiver is appointed or
(iv) A default is made in paying the principal and/ or interest and the holder of the
charge brings an action to enforce his security.
Question 160
Discuss the concept of shelf prospectus, the provisions for issue and filing of such
prospectus under the Companies (Amendment) Act, 2000 (November 2008)
Answer
Shelf prospectus
The Companies (Amendment) Act, 2000 introduced a new section 60 A relating to the
issue of Shelf Prospectus. Shelf Prospectus means a Prospectus issued by any financial
institution or bank for one or more issues of securities or class of securities specified in
that Prospectus.
1. Any public financial institution, public sector bank or scheduled bank whose main
object is financing shall file a Shelf Prospectus.
Financing means making loans to or subscribing in the capital of a private industrial
enterprise engaged in infrastructural financing or such other company to be notified
by the central government.
2. A company filing a Shelf Prospectus with the Registrar is not required to file
Prospectus every time it seeks to make a public issue.
3. A company filing a Shelf Prospectus is required to file an Information Memorandum
on all material facts relating to
(i) New charges created;
(ii) Changes in the financial position as have occurred between the first offer of
securities
(iii) Previous offer of securities and the succeeding offer of securities within
the time to be prescribed by the central government.
4. An Information Memorandum shall be issued to the public along with the Shelf
Prospectus filed at the stage of the first offer of securities and such prospectus shall
be valid for a period of one year from the date of the opening of the first issue of
securities under the Prospectus.

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Where an update of Information Memorandum is filed every time an offer of securities
is made, such memorandum together with the shelf Prospectus shall constitute the
Prospectus.
Question 161
A public limited company has only seven shareholders, all the shares being fully paid–
up. All the shares of one such shareholder are sold by the court in an auction and
purchased by another shareholder. The company continues to carry on business
thereafter. Discuss the liabilities of the shareholders of the company under the
Companies Act, 1956.
(November 2008)
Answer
Consequences of membership falling below legal minimum
The problem in the question relates to reduction of membership below the statutory
minimum. Section 12 of the Companies Act, 1956 requires a public company to have a
minimum of seven members. If at any time the membership of a public company falls
below seven and it continues its business for more than six months, then according to
Section 45 of the Act every such member who was aware of this fact would be
personally and severally liable for all debts contracted by the company during the
period and may be severally sued for all debts contracted after six months.
Accordingly, in the given problem, the remaining six members shall incur personal
liability for the debts contracted by the company,
(i) If they continued to carry on the business of the company with that reduced
membership beyond the six month period.
(ii) Only those members who knew of this fact of reduced membership shall be liable.
(iii) The liability shall extend only to the debts contracted after six months from the
date of auction of that member’s shares.
Question 162
What are the conditions for the company for the buy–back of its own shares? Whether
there is any time limit for the completion of buy–back of its shares?(November 2008)
Answer
Conditions of Buy Back
Section 77A of the Companies Act,1956 provider for a company to purchase its own
shares or other specified securities subject to certain conditions and regulations. Thus
the Act says that no company shall purchase its own shares or other specified
securities unless-
(a) the buy–back is authorised by its articles;
(b) a special resolution has been passed in the general meeting of the company
authorizing the buy–back;
Provided that nothing contained in this clause shall apply in any case where:-
(1) The buy–back is of less than 10% of the total equity paid up capital and free

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reserves of the company; and
(2) Such buy–back has been authorised by the board by means of resolution passed
at its meeting;
(c) the buy–back is or less than 25% of the total paid up capital or free reserves of the
company
(d) the ratio of the debt owned by the company is not more than twice the capital and
its free reserves after such buy–back;
(e) all the shares or the specified securities for buy–back are fully paid up;
(f) the buy–back of the shares or other specified securities listed on any stock
exchange is in accordance with the regulations made by Securities Exchange Board
of India in this behalf;
(g) the buy–back in respect of shares or other specified securities other than those
specified in clause (f) is in accordance with the guidelines as may be prescribed.
Time limit for completion of buy–back: Every buy–back shall be completed within 12
months from the date of passing the special resolution or a resolution passed by the
Board under the clause (b) of sub– section (2) of Section 77A.
Question 163
Apex Metals Limited wants to provide financial assistance to its employees, to enable
them to subscribe for certain number of fully paid shares. Considering the provision of
the Companies Act, 1956, what advice would you give to the company in this regard?
(November 2008)
Answer
Financial assistance for purchase of own shares
Section 77 of the Companies Act, 1956 provides that no public company and no private
company being a subsidiary of a public company, can give financial aid to any person,
either directly or indirectly and whether by way of loan, guarantee or surety or
otherwise, for or in connection with purchase or subscription made or to be made of
any of its own shares or of its holding company.
There are, however, certain exceptions to this rule, namely-
(a) a banking company may lend money for the purpose in the ordinary course of its
business but not on the security of its own shares, or
(b) The company in pursuance of a scheme for the purchase of or subscription for fully
paid shares of the company(or those of its holding company) to be held by trustees
for the benefit of the employees of the company, may advance loan for the purpose.
(c) The company may advance a loan to a person bonafide in its employment (other
than directors or managers) to enable them to purchase or subscribe for fully paid
shares for an amount not exceeding their salary or wages for a period of six months.
(section 77)
However, the exception to this rule allows making of loans by a company, to its
bonafide employees for purchasing or subscribing to the fully paid shares of the

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company. Section 77(3) provided that such financial assistance should not exceed six
months’ wages or salary of the employee.
Question 164
State whether the following statements are correct or incorrect. Give reasons:
(i) Right shares means shares which are issued by a newly formed company.
(ii) A company should file its annual return within six month of the close of the financial
year.
(iii) A bearer of a share warrant of a company is not member of the company.
(iv The shareholder of the company is general meeting can increase the rate of
dividend recommended by the Board of Directors.
(v) Debenture with voting rights can be issued only if permitted by the Articles of
Association.
(November 2008)
Answer
(i) Right shares
According to section 81 of the Companies Act, 1956 where the shares are offered to
the existing shareholders who have pre-emptive right to purchase the additional
shares of the company to expand its activities or it may stand in need of more
financial resources, it is called right issue.
Hence the given statement is incorrect.
(ii) Filing of annual return
Section 159 of the Companies Act, 1956 states that a company should file its annual
return within sixty days from the date the Annual General Meeting is held.
(iii) Share warrant
According to the provision relevant to share warrant, it has been mentioned that
the bearer of a share warrant of a company can be a member only if the articles so
provide. This says that the bearer is not a member of the company unless and until
the articles of a company may provide that the bearer of a share warrant shall be
deemed to be a member of the company for the purposes defined by the articles.
So the given statement is correct.
(iv) Dividend
The shareholders can decrease the rate of the dividend but cannot increase in the
general meeting. Hence the given statement is incorrect.
(v)Debentures with voting rights
As given under section 117 of the Companies Act,1956 no company can issue any
debentures carrying voting rights at any meeting of the company, whether generally
or in respect of any particular classes of business.

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Question 165
State the legal position in the following circumstances with reference to the provisions
in the Companies Act, 1956.
At an adjourned extraordinary general meeting of a Public Ltd. Company adjourned for
want of quorum, only 3 members are personally present. (November 2008)
Answer
Quorum
Quorum means the minimum number of members who must be present in order to
constitute a meeting and transact business thereat. Thus the meeting cannot proceed
with business in the absence of quorum unless the articles of the company provide
otherwise.
As per Section 174(5) of the Companies Act,1956, if a meeting is adjourned for want of
quorum and at the adjourned meeting also quorum is not present, within half an hour
from the time appointed for holding the meeting, the members present shall be
quorum. Assuming here, that the adjournment of meeting is called because of absence
of quorum, the above- stated provision will prevail. Accordingly, three members who
are personally present can validly conduct the meeting. But if the adjournment has
taken place for any reason other than absence of quorum, the quorum as per articles or
at least five members as per Section 174(1), must be present.
Question 166
What do you mean by Transmission of shares? Differentiate between Transfer of shares
and Transmission of shares. (November 2008)
Answer
Transmission of shares
Transmission of shares takes place: (i) When the registered shareholder dies, or (ii)
When he is adjudged insolvent (iii) and where holder is a company, if it goes in to
liquidation.
Distinction between transfer and transmission.
The following are the points of distinction between transfer and transmission of shares.
(i) Transfer takes place by a voluntary and deliberate act of the transferor, while
transmission is the result of operation of law.
(ii) In case of transfer, the transferor and the transferee have to execute an instrument
of transfer while in the case of transmission shares are transmitted on the death,
insolvency of a member and instrument of transfer is not required; only a proof of
his title to the shares is required.
(iii) Transfer is the normal method of transferring property in the shares, whereas
transmission of shares takes place on the death, or insolvency of a shareholder.

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CHAPTER - The Indian Contract Act, 1872 1-25

CHAPTER - The Sale of Goods Act, 1930 25-43

CHAPTER - The India Partnership Act, 1932 44-60

CHAPTER - The Negotiable Instruments Act, 1881 61-95

CHAPTER - The Payment of Bonus Act, 1965 96-117

CHAPTER - The Employees Provident Fund and 118-137

CHAPTER - The Cooperative Societies Act, 1912

CHAPTER - The Companies Act, 1956

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 1

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 2

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 3

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 4

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 5

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 6

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 7

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 8

Anticipatory breach of contract

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 9

Contract of indemnity Contract of Guarantee

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 10

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 11

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 12

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 13

Coercion Undue Influence

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 14

Supervening impossibility: When performance of a promise becomes impossible or

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 15

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 16

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 17

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 18

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 19

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 20

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 21

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 22

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 23

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 24

PREPARED BY: MUKESH VERMA- M.B.A / M.COM (9212528831) 25

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(November 2002, November 2003)

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